Is it possible for X to go insolvent under Elon Musk's leadership?
Elon Musk's vulgar tirade against advertisers withdrawing from X, previously referred to as Twitter, has left specialists puzzled. If these advertisers continue to abandon X and fail to return, can X remain afloat?
In April, I had the first of many disordered interviews with Musk concerning his purchase of X.
He made a comment that, looking back, was quite enlightening, but I didn't notice it then.
He mentioned advertising and said, "When companies like Disney are happy to promote their children's films on Twitter, and Apple willingly advertises their iPhones there, it shows that Twitter is an effective platform for advertisements."
After a seven-month period, Disney and Apple have ceased to advertise on X – and Musk is rudely advising the businesses that have departed to take a hike.
After a US group called Media Matters for America conducted a probe, businesses temporarily halted advertisements due to their association with pro-Nazi content. X vehemently disputed the findings of the study, criticized its investigative techniques, and initiated legal proceedings against the group.
During a heated discussion on Wednesday, Musk mentioned the term "bankruptcy," indicating the extent of harm the advertising boycott is causing to the company's finances.
The notion of bankruptcy may seem absurd for a business he acquired last year for $44bn (£35bn). However, it is a plausible scenario.
To comprehend the reason, you must examine how dependent X is on income from advertisements – and why advertisers are not returning.
Even though we're lacking the most recent data, approximately 90% of X's income last year came from ads. This is the core aspect of the company.
Musk strongly suggested this on Wednesday.
"He stated that if the business collapses, it will be due to an advertiser pullout, which will ultimately lead to the company's bankruptcy."
Mark Gay, the lead client officer at Ebiquity, a marketing consultancy firm that collaborates with numerous businesses, reports that there's no indication of anyone coming back.
"He states that the funds have been withdrawn and no one is forming a plan for reinvestment there."
Walmart, the retail behemoth, declared on Friday that it has ceased to advertise on X.
In a Wednesday interview at the New York Times DealBook Summit, Musk addressed advertisers who had left X, and his remarks made them cringe even more.
"Hello Bob," he mentioned, referring to Bob Iger, the CEO of Disney.
As per Lou Paskalis from AJL Advisory, if Musk targets CEOs in this manner, they would be more hesitant to engage with X.
The main analyst at Insider Intelligence, Jasmine Enberg, notes: "One doesn't need to be a social media guru to comprehend that openly criticizing advertisers and businesses which fund X's operations won't be beneficial for the business."
Is it possible for X to become insolvent?
What will Musk be left with if advertisers permanently disappear?
During my conversation with him in April, it was apparent that he recognized subscriptions on X wouldn't supplant advertising revenue.
"If you have around a million subscribers each paying approximately $100 annually, that amounts to $100 million. That's quite a modest income source compared to advertising," he informed me.
Twitter made approximately $4 billion from advertising in 2022. However, Insider Intelligence predicts a decrease to $1.9 billion in the current year.
The business has two significant expenditures. The initial one is the cost of its workforce. Musk has already drastically reduced X, resulting in thousands of layoffs.
The subsequent concern is managing Musk's loans that he used to purchase Twitter, which amount to roughly $13 billion. According to Reuters, the company is now responsible for annual interest payments of approximately $1.2 billion.
Should the company be unable to cover the interest of its loans or bear the cost of paying its employees, indeed, X faces the real risk of bankruptcy.
However, that would be a drastic situation that Musk would undoubtedly want to steer clear of.
He possesses alternatives. The easiest course of action for Musk would be to invest more of his wealth, but it appears he's not keen on this idea.
Musk might consider revisiting the terms with the banks to lessen the burden of interest payments. He could potentially request a "payment in kind" interest mode, where payments can be postponed.
However, if attempts at renegotiation fail and the banks aren't able to recover their funds, bankruptcy might be the sole solution. In such a situation, the banks might advocate for a shift in the management.
"Things could get incredibly complicated and chaotic," states Jared Ellias, a legal professor at Harvard Law School. "It would also be tremendously difficult. It would generate a significant amount of news as he would regularly be subpoenaed and required to give evidence in court."
This could severely damage Musk's professional standing and could also affect his future borrowing abilities.
In a situation where bankruptcy occurs, would X just cease to function?
Ellias expresses his skepticism, stating, "I find that incredibly difficult to accept." He continues, "If such a situation were to occur, it would be because Elon made a drastic decision. However, even in such circumstances, the lenders would still have the choice to pressure the business into bankruptcy, secure the appointment of a trustee, and restore the operations," he adds.
What's the future for Musk?
The most apparent resolution to these issues for X is to quickly identify an alternative source of income. No doubt, Musk is making efforts.
He has initiated a new service for audio and video calls. Recently, he broadcasted himself playing video games, with the aspiration that X can rival applications such as Twitch.
His desire is for X to evolve into an "all-in-one app", encompassing everything from messaging to digital transactions.
The New York Times, which managed to obtain Musk's investor presentation from last year, reported that X was expected to generate $15 million from a payment enterprise in 2023, and this figure was projected to increase to approximately $1.3 billion by 2028.
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X also possesses an enormous collection of data, and its extensive record of dialogues can be employed to educate chatbots. Musk is of the opinion that this data holds immense worth.
Indeed, X does possess potential.
However, in the immediate future, none of these alternatives fill the gap left by advertisers.
That's why Musk's vulgar tirade left many perplexed.
"Paskalis admits to not having any sensible theories. He believes there's a strategy for income generation in his mind that he can't quite grasp."
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