Is it possible for X to face bankruptcy under Elon Musk's leadership?
Elon Musk's surprising and vulgar criticism of advertisers abandoning X, which was previously known as Twitter, has left specialists puzzled. If these advertisers continue to depart and fail to return, is X's survival plausible?
In April, I had the first of several disorderly discussions with Musk regarding his purchase of X.
He made a comment that, looking back, was quite telling, but it didn't register with me then.
He mentioned in the context of advertising, "If organizations like Disney are at ease promoting their children's films [on Twitter], and Apple doesn't hesitate to market iPhones, it's a strong sign that Twitter is an effective advertising platform."
After a period of seven months, both Disney and Apple have ceased their advertising on X – and Musk is bluntly telling these departed companies to essentially "take a hike."
After an inquiry by a US entity, Media Matters for America, highlighted ads popping up alongside pro-Nazi content, the businesses decided to halt their advertisements. X vehemently disputed the findings of the report, criticizing its research techniques, and initiated legal action against the organization.
During a heated discussion on Wednesday, Musk also mentioned the term "bankruptcy," indicating the significant impact the advertisement boycott is having on the company's financial health.
It may seem implausible that a business he purchased for $44bn (£35bn) last year could face bankruptcy. However, it's not out of the question.
To comprehend the reason, it's essential to examine how dependent X is on income from advertising – and why advertisers aren't returning.
Even though we lack the most current statistics, approximately 90% of X's income stemmed from advertising the previous year. This is the core of their operations.
Musk strongly suggested this on Wednesday.
"He stated that if the business collapses, it will be due to an advertising boycott, which will lead to the company's bankruptcy."
Mark Gay, the head customer officer at Ebiquity, a marketing consultancy firm that collaborates with numerous businesses, states that there are no indications 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"He says that the funds have been withdrawn and no one is devising a plan for reinvestment there."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 stopped running advertisements on X.
In an interview at the New York Times DealBook Summit on Wednesday, Musk addressed advertisers who had left X, which made them uncomfortable. He then made a statement that caused even more discomfort among the advertisers.
"Hello Bob", he uttered, alluding to the CEO of Disney, Bob Iger.
When Musk targets top executives in this manner, they may become more hesitant to engage with X, states Lou Paskalis from AJL Advisory, a marketing consultancy firm.
The main analyst at Insider Intelligence, Jasmine Enberg, states: "You don't need to be a social media guru to realize that openly criticizing advertisers and firms that fund X's operations will likely harm the business."
Is it possible that X could actually face bankruptcy?
What resources does Musk have if the advertisers permanently leave?
When I had a conversation with him in April, it was evident that he comprehended that X's subscriptions were not going to take the place of advertising revenue.
"If a million individuals subscribe for roughly $100 annually, that totals $100 million. However, compared to advertising, this is quite a modest income," he shared with me.
Insider Intelligence projected that Twitter's ad revenue, which was approximately $4 billion in 2022, will decline to about $1.9 billion this year.
The business has two significant expenditures. The primary one is the cost of its personnel. Musk has already drastically reduced X, resulting in the dismissal of thousands of employees.
The second obligation involves managing the debts Musk incurred when he purchased Twitter, which amount to roughly $13bn. According to Reuters, the company now has an annual interest payment of around $1.2bn.
Should the business be unable to cover its loan interest or compensate its employees, indeed, there is a possibility that X may go insolvent.
However, that's a drastic situation that Musk would undoubtedly aim to steer clear of.
He has alternatives. The easiest course of action for Musk would be to invest more of his personal wealth, but it seems he is not inclined to take that path.
Musk might consider renegotiating with the banks to reduce the burden of interest payments. For instance, he could request a "payment in kind" interest, which allows for the postponement of payments.
If the banks are unable to recover their money through renegotiation, bankruptcy might be the only solution. At such a juncture, the banks may advocate for a management shift.
"Things would get incredibly chaotic and complicated," states Jared Ellias, a law professor at Harvard Law School. "It would also be intensely difficult. It would generate a significant amount of press coverage as he would be repeatedly subjected to deposition and required to give 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, saying, "It's quite difficult for me to accept." He continues, "Such a scenario would only occur if Elon deliberately sabotaged things. Yet even in that instance, the lenders could potentially force the company into bankruptcy, ensure a trustee is assigned, and restore operations," he adds.
What's Musk's subsequent move?
The clear answer to all these issues for X is to rapidly discover a new income source. Musk is undoubtedly making an effort.
He has initiated a fresh audio and video call service. The previous month, he broadcasted live his gaming sessions – his aspiration is for X to rival applications such as Twitch.
His aspiration is for X to evolve into an "all-in-one app", encompassing everything ranging from messaging to online transactions.
The New York Times obtained the presentation Musk showed to investors last year. In it, he projected that X would generate $15 million in 2023 from a payments venture and that revenue would increase to approximately $1.3 billion by 2028.
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See: A surprise BBC interview with Elon Musk… condensed into 90 seconds (April 2023)
X possesses a considerable amount of data, and its extensive collection of dialogues can be utilized to teach chatbots. Musk is of the opinion that this data holds immense value.
Thus, X indeed possesses potential.
However, in the immediate future, none of these alternatives fill the void left by the advertisers.
That's why Musk's vulgar tirade left many puzzled.
"Paskalis admits to not having any logical theories. He suggests that there's a business strategy in his mind that he can't quite grasp."
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