Is it possible for X to face bankruptcy under Elon Musk's leadership?
Experts are puzzled by Elon Musk's harsh criticism of advertisers abandoning X, previously referred to as Twitter. If these advertisers continue to withdraw and fail to return, does X have the capacity to endure?
In April, I had my initial conversation with Musk, which was the first of several tumultuous dialogues about his purchase of X.
He made a comment that, looking back, was quite insightful, but I didn't notice it back then.
He mentioned advertising and said, "When Disney is happy to promote their children's films [on Twitter], and Apple is willing to market iPhones, it suggests that Twitter is a suitable platform for advertising."
After a period of seven months, both Disney and Apple have ceased their advertising on X. Musk is boldly instructing those corporations who have departed to essentially "go to hell."
Businesses stopped advertising following a probe by a U.S. entity, Media Matters for America, which highlighted ads being displayed alongside pro-Nazi content. X vehemently disputed the findings, casting doubt on the research techniques used, and initiated legal action against the entity.
In a heated discussion on Wednesday, Musk also mentioned the term "bankruptcy," highlighting the significant impact the ad boycott has on the company's financial health.
The possibility of bankruptcy may seem absurd for a business he acquired for $44bn (£35bn) the previous year. However, it can happen.
To comprehend the reason, you must examine how dependent X is on advertising income – and why advertisers are not returning.
Even without the most recent data, approximately 90% of X's income last year was generated through advertising. This forms the core of the company.
Musk strongly suggested this on Wednesday.
"He stated that if the business collapses, it would be due to an advertising boycott, which would ultimately lead to the company's bankruptcy."
Mark Gay, the main customer official at the marketing consultancy firm Ebiquity, which collaborates with numerous businesses, states that there's no indication of anyone coming back.
"He states that the funds have been withdrawn and no one is formulating a plan for re-investment in that area."
Walmart, the retail behemoth, declared on Friday that it has ceased advertising on X.
In a Wednesday interview at the New York Times DealBook Summit, Musk addressed advertisers who had left X, telling them their place. He further made a statement that caused even more discomfort among advertisers.
"Hello Bob," he greeted, alluding to Bob Iger, the CEO of Disney.
Lou Paskalis from AJL Advisory suggests that when Musk targets top executives in this manner, they may become even more hesitant to engage with X.
The chief analyst at Insider Intelligence, Jasmine Enberg, notes: "You don't have to be a social media specialist to realize that openly and personally criticizing advertisers and firms that finance X's operations won't bode well for the business."
Is it possible for X to go under?
Without permanent advertisers, what is Musk left with?
During my conversation with him in April, it was evident he comprehended that X's subscriptions wouldn't substitute the revenue from advertisements.
"If you have a million subscribers paying around $100 annually, that equates to $100 million. Although it seems like a lot, it's actually a minor source of income compared to advertising," he explained to me.
Twitter generated approximately $4 billion from advertising in 2022. However, Insider Intelligence predicts that this figure will decline to $1.9 billion in the current year.
The organization has two significant expenses. The initial one is the cost of its employees. Musk has drastically reduced X, leading to the termination of thousands of workers.
The second aspect involves managing the debts Musk incurred to purchase Twitter, which amount to roughly $13 billion. According to Reuters, the company is now required to make annual interest payments of approximately $1.2 billion.
Should the corporation fail to cover the interest on its debts or compensate its employees, indeed, X might indeed face bankruptcy.
However, such a drastic situation is certainly something Musk would absolutely want to steer clear of.
He has choices. The easiest route for Musk would be to invest more of his own wealth, but it seems he's not keen on that idea.
Musk has the option to re-negotiate with the banks for less burdensome interest rates. For instance, he could request for "payment in kind" interest, which allows for the deferment of payments.
However, if the renegotiation fails and the banks are unable to recover their funds, bankruptcy might be the sole recourse. At this stage, the banks might attempt to enforce a management restructuring.
"It's going to be quite chaotic and intricate," states Jared Ellias, a law professor at Harvard Law School. "Moreover, it's going to be exceptionally tough. It will generate a lot of media attention as he would be repeatedly questioned and required to provide evidence in court."
This could severely damage Musk's professional standing and could also influence his ability to secure loans in the future.
In a situation of bankruptcy, would X just cease to function?
Ellias expresses his skepticism, stating, "It's difficult for me to accept that." He continues, "If such a situation arose, it would be due to Elon's abrupt withdrawal. However, even in that case, the company's lenders would have the choice to push the business towards insolvency, secure a trustee's appointment, and restore the company's operations," he adds.
What's Musk's next move?
The clear answer to all these dilemmas for X is to quickly identify an alternative source of income. Surely, Musk is making efforts.
He has initiated a new service for audio and video calls. He broadcasted himself playing video games last month, aiming for X to rival applications such as Twitch.
His desire is for X to be the "all-in-one app", encompassing everything from messaging to digital transactions.
The New York Times reportedly accessed the presentation Musk was showing to investors last year. It indicated that X was projected to generate $15m from a payments enterprise in 2023, with an estimated increase to roughly $1.3bn by 2028.
This footage cannot be viewed
In order to view this video, JavaScript must be activated in your browser. Take a look at Elon Musk's surprising BBC interview, condensed into 90 seconds (April 2023).
X possesses an enormous repository of data, and its extensive collection of dialogues can be utilized to educate chatbots. Musk holds the opinion that this data is exceptionally valuable.
X indeed possesses potential.
However, in the immediate future, none of these alternatives fill the gap left by the advertisers.
That's why Musk's vulgar tirade left many perplexed.
"Paskalis admits, "I can't seem to comprehend any logical theories. He seems to have a financial strategy in mind that I can't quite grasp."
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