Is it possible for X to go bankrupt under Elon Musk's leadership?
Elon Musk's vulgar tirade against advertisers who are boycotting X, previously known as Twitter, has left specialists perplexed. If the exodus of advertisers continues and they don't return, would X be able to withstand it?
In April, I had the first of numerous disordered discussions with Musk regarding his purchase of X.
He made a comment that, looking back, was quite insightful, but I didn't catch it in the moment.
He mentioned in the context of advertising that if Disney is confident enough to promote their children's films on Twitter, and if Apple is equally assured to market their iPhones there, these instances serve as strong evidence that Twitter is indeed a reliable platform for advertising.
Seven months down the line, both Disney and Apple have ceased advertising on X. Musk is now advising those companies that have departed to essentially "get lost."
The businesses halted advertising following an inquiry by a US entity, Media Matters for America, which highlighted ads being displayed alongside pro-Nazi content. X vigorously disputed the study, doubting the validity of its research techniques, and initiated legal action against the group.
During a heated discussion on Wednesday, Musk also mentioned the term "bankruptcy", indicating the significant impact the advertising boycott is having on the company's financial health.
The idea of bankruptcy might seem far-fetched for a company he acquired last year for $44 billion (£35 billion). However, it is not outside the realm of possibility.
To comprehend the reason, it's necessary to examine how dependent X is on ad earnings – and why ad patrons aren't returning.
Even though we don't possess the most current statistics, approximately 90% of X's income last year came from advertising. It's the core of their operations.
Musk strongly suggested this on Wednesday.
"He stated that the business would collapse due to an advertising boycott, which would ultimately lead to its bankruptcy."
Ebiquity's chief client officer, Mark Gay, who collaborates with numerous businesses, indicates that there's no evidence of anyone coming back.
"He says that the funds have been withdrawn and no one is devising a plan for reinvestment there."
Walmart, the retail behemoth, declared on Friday that it has ceased its advertising on X.
In an interview at the New York Times DealBook Summit on Wednesday, Musk addressed advertisers who had left X. His comments caused these advertisers to react even more negatively.
"Hello Bob," he remarked, alluding to Bob Iger, the CEO of Disney.
When Musk targets top executives in this manner, they'll become even more hesitant to engage with X, states Lou Paskalis from AJL Advisory, a marketing consultancy firm.
Insider Intelligence's main analyst, Jasmine Enberg, points out: "One doesn't need to be a social media guru to realize that publicly and personally criticizing advertisers and firms that finance X's operations will adversely affect business."
Is it possible for X to truly become insolvent?
Without advertisers permanently, what resources does Musk possess?
During my conversation with him in April, it was evident he comprehended that subscriptions on X wouldn't be able to supplant advertising revenue.
"If you have a million subscribers paying approximately $100 annually, that equals $100m. This is a rather modest income source compared to advertising," he informed me.
In 2022, the income Twitter generated from advertising was approximately $4bn. However, Insider Intelligence predicts that this figure will decrease to $1.9bn this year.
The business has two significant expenses. The initial one is the cost of its employees. Musk has already drastically reduced X, resulting in thousands of layoffs.
The repayment of loans Musk obtained to purchase Twitter, amounting to roughly $13bn, is the second issue. According to Reuters, the firm is now obligated to make annual interest payments of approximately $1.2bn.
Should the business be unable to cover the interest on its debts or meet payroll expenses, indeed, X might truly face bankruptcy.
However, Musk would certainly strive to steer clear of such a drastic situation.
Musk has choices. The easiest solution for him would be to invest more of his own funds, but it appears he's not keen on this idea.
Musk has the option to renegotiate with the banks for less burdensome interest payments. For instance, he could request for "payment in kind" interest, which involves postponing the payments.
If the process of renegotiating fails and the banks are unable to recover their funds, bankruptcy might be the only remaining solution. In such a scenario, the banks may advocate for a shift in the management structure.
"This would turn out to be quite chaotic and complicated," states Jared Ellias, a legal scholar at Harvard Law School. "Not to mention it would be tremendously difficult. It would generate significant media attention as he would be continually subpoenaed and required to provide evidence in court."
This could be disastrous for Musk's professional standing, and it could also influence his future borrowing capacity.
In a situation of bankruptcy, would X just cease to function?
Ellias expresses his skepticism, stating, "It's quite difficult for me to accept that." He continues, "Such a situation would only occur if Elon consciously decided to destabilize things. However, even in such a scenario, the lenders would still have the possibility to drive the company into bankruptcy, secure the appointment of a trustee, and reestablish operations," he adds.
What's Musk's next move?
The clear answer to all these issues for X is to quickly identify a new source of income. Musk is definitely making an effort.
He has initiated a fresh service for audio and video calls. Last month, he broadcasted himself playing video games, with the aspiration that X can rival applications such as Twitch.
He desires X to evolve into an "all-in-one application", encompassing everything from messaging to digital transactions.
The New York Times reported that they obtained the investor presentation Musk made last year, which projected that X would generate $15 million in 2023 from a payments sector, and this figure was expected to increase to approximately $1.3 billion by 2028.
This video cannot be displayed.
You must activate JavaScript in your browser to view this video.
Check out: A surprising BBC interview with Elon Musk… condensed into 90 seconds (April 2023)
X possesses a large amount of data, and its extensive collection of dialogues can be employed to educate chatbots. Musk is of the opinion that this information holds significant worth.
Therefore, X does possess potential.
However, in the immediate future, none of these alternatives can fill the gap left by advertisers.
That's why Musk's vulgar explosion was so confusing for many.
"Paskalis admits, "I can't come up with any logical theories. He seems to have a profit scheme in his mind that I can't grasp."
Associated Subjects
Additional information on this narrative
Elon Musk initiates vulgar assault on X promoters
What is the purpose of WeChat and what are the reasons behind Elon Musk's desire to replicate it?
Elon Musk travels to Israel following an antisemitism controversy.
X files a lawsuit against advocacy group for allegations of antisemitism.
X ad boycott accelerates in the midst of antisemitism controversy
Headlines
Israeli troops advancing into southern Gaza
A German individual was murdered in Paris due to an assault involving a
Footage 'depicts armed officers confronting Paris suspect' Video
Characteristics
Is it possible for X to face bankruptcy under Elon Musk's
The nation where Kissinger left behind a trail of destruction and disorder.
A harmonizing Anglo-Irish voice, during the era of explosives and gunfire.
Chance of insolvency following student loan debacle
Antagonists from the Bond franchise under scrutiny
Prominent feminist Gloria Steinem discusses the 'deadly' urge to regulate women's reproductive systems.
The ways in which scientists are combating diseases exacerbated by climate change
White viewers are excessively at ease with stereotypical portrayals of black individuals.
Oreo donuts to mini pizzas: Indian street cuisine becomes fashionable.
On other sections of the BBC
Reasons why US passengers are avoiding low-cost airlines
Impressive indoor community swimming pools in Berlin
The infamous female rulers of New York in the 1910s
Top Viewed
Services offered by BBC News
© 2023 BBC. The BBC doesn't bear responsibility for the content on other websites. Learn about our stance on linking to other websites.
