Is it possible for X to go under financially with Elon Musk at the helm?
Musk's vulgar assault on advertisers pulling out from X, previously referred to as Twitter, has left specialists perplexed. If the advertiser exodus continues and they don't return, does X stand a chance of staying afloat?
In April, I had the first of numerous disorganized discussions with Musk regarding his purchase of X.
He made a comment that, looking back, was quite enlightening, but I overlooked it in the moment.
He mentioned advertising and said, "When companies like Disney are happy to promote their children's films and Apple willingly advertises their iPhones on Twitter, it shows that Twitter is a suitable platform for advertising."
Half a year plus one month on, Disney and Apple have stopped promoting on X – and Musk is rudely advising the firms that have departed to take a hike.
Businesses halted advertisements following an inquiry by a US group, Media Matters for America, that pointed out ads were being displayed alongside pro-Nazi content. X strongly disputed the findings, casting doubt on the investigative techniques used, and initiated legal proceedings against the group.
During a heated discussion on Wednesday, Musk also mentioned the term "bankruptcy", indicating the severe impact the ad boycott is having on the company's financial health.
The idea of bankruptcy may seem unimaginable for a company he purchased at $44bn (£35bn) the previous year. However, it's a possibility.
To comprehend the reason, you need to examine how dependent X is on income from advertising – and why advertisers are not returning.
Even though the most recent data isn't available, approximately 90% of X's income came from advertising last year. This constitutes the core of the business.
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 principal customer officer at Ebiquity, a marketing consultancy firm that collaborates with numerous businesses, indicates that there's no evidence of anyone coming back.
"He states that the funds have been withdrawn and no one is formulating a plan for reinvestment there."
Walmart, the retail behemoth, declared on Friday that it has ceased its advertisements on X.
In an interview at the New York Times DealBook Summit on Wednesday, Musk had strong words for advertisers who left X. He then made a comment that caused even more discomfort among the advertisers.
"Hello Bob," he uttered, alluding to the CEO of Disney, Bob Iger.
When Musk targets CEOs in this manner, they become even more hesitant to engage with X, according to Lou Paskalis from the marketing consultancy firm, AJL Advisory.
The main analyst at Insider Intelligence, Jasmine Enberg, states: "You don't need to be a social media whiz to realize that openly criticizing advertisers and firms that fund X's operations will negatively impact business."
Is it possible that X could actually become insolvent?
With advertisers permanently leaving, what resources does Musk possess?
During my conversation with him in April, it was evident that he realized that subscriptions on X wouldn't be able to supplant advertising revenue.
"If you've got a million subscribers paying roughly $100 annually, that sums up to $100 million. This is a relatively modest income source compared to ad revenue," he informed me.
Twitter made approximately $4 billion from advertising in 2022. However, Insider Intelligence predicts a significant decrease to $1.9 billion for the current year.
The firm has two significant expenditures. The initial one is its payroll expenses. Musk has already significantly reduced X, leading to the dismissal of thousands of employees.
Musk borrowed money to purchase Twitter, which amounted to roughly $13bn. Now, according to Reuters, the company has an annual interest payment obligation of around $1.2bn.
Should the business be incapable of covering the interest of its debts or sustaining employee salaries, indeed, there is a real possibility that X may face bankruptcy.
However, such a severe situation is definitely something Musk would desire to steer clear of.
He has choices. The easiest route for Musk would likely be to invest more of his own funds, but it appears that he's not inclined to do that.
Musk might attempt to re-discuss terms with the banks to lower the burden of interest payments. For instance, he could request for "payment in kind" interest, which essentially means postponing payments.
If the renegotiation process fails and the banks are unable to recover their funds, bankruptcy might be the sole alternative. At that juncture, the banks might attempt to instigate a leadership shift.
"It would be incredibly chaotic and intricate," states Jared Ellias, a law professor at Harvard Law School. "It would also be immensely demanding. The situation would garner significant media attention due to his continual deposition and obligatory court testimonials."
This could severely damage Musk's professional credibility, and also influence his future borrowing capacity.
In a situation where bankruptcy occurs, would X just cease to function?
Ellias expresses his skepticism, stating, "It's quite unlikely,". He continues, "Such a circumstance would only arise if Elon chose to abruptly withdraw support. But even in that case, creditors could potentially drive the company towards bankruptcy, ensure a trustee is assigned, and essentially revive the company," he adds.
What does the future hold for Musk?
The clear answer to all these issues for X is to promptly identify an alternative source of income. Musk is indeed making efforts.
He has initiated a new service for audio and video calls. He broadcasted himself playing video games last month, with the aspiration that X can rival applications such as Twitch.
His desire is for X to transform into an all-in-one application, encompassing features ranging from messaging to online transactions.
The New York Times, which obtained the investor presentation Musk made last year, reported that X was projected to generate $15m from a payment venture in 2023, with an expected increase to roughly $1.3bn by 2028.
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Check out: a surprise BBC interview with Elon Musk… summed up in 90 seconds (April 2023)
X possesses a substantial amount of data, and its extensive collection of dialogues can be utilized to educate chatbots. Musk is of the view that this information holds immense value.
Thus, X indeed possesses potential.
However, in the immediate future, none of these alternatives fill the gap left by advertisers.
That's why Musk's vulgar eruption left many completely perplexed.
"Paskalis admits, "I have no sensible theories. He has a revenue model in his mind that I can't fully grasp."
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