Is it possible for X to face bankruptcy under Elon Musk's leadership?
Musk's crude criticism of advertisers pulling out of X, previously referred to as Twitter, has left industry specialists perplexed. If the advertisers continue to withdraw without returning, does X stand a chance of survival?
In April, I had my first conversation with Musk, which was one of several disorganized interviews regarding his purchase of X.
He made a comment that, looking back, was quite telling, but it didn't register with me initially.
He mentioned advertising, stating, "If companies like Disney are happy to promote kids' films on Twitter, and Apple doesn't hesitate to advertise iPhones there, then these are strong signs that Twitter is an effective advertising platform."
After a period of seven months, both Disney and Apple have ceased their advertising on X. In response, Musk is advising those departed companies to essentially take a hike.
Businesses halted advertising following an inquiry by a US establishment, Media Matters for America, which highlighted ads being displayed alongside pro-Nazi content. X vehemently disputed the findings, scrutinizing its research techniques, and initiated legal action against the institution.
During a heated conversation on Wednesday, Musk didn't shy away from mentioning "bankruptcy." This indicates the severe impact the advertising boycott is having on the company's financial performance.
The idea of bankruptcy may seem absurd for a business he acquired for $44bn (£35bn) the previous year. However, it is a possibility.
To comprehend the reason, it's necessary to examine the extent of X's dependence on ad income – and clarify why advertisers are not returning.
Even though the most recent data isn't available, approximately 90% of X's income last year came from advertising. This is essentially 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 consequently lead to the company's bankruptcy."
Mark Gay, the chief client officer at Ebiquity, a marketing consultancy that collaborates with numerous businesses, indicates that there seems to be no indication of anyone coming back.
"He mentions that the funds have been withdrawn and no one is formulating a plan for reinvestment there."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.
During Musk's conversation with marketers who left X, at the New York Times DealBook Summit on Wednesday, he made a comment that caused even more discomfort amongst the advertisers.
"Hello Bob," he uttered, indirectly mentioning Disney's CEO, Bob Iger.
Musk's targeting of CEOs in this manner will make them more hesitant to engage with X, according to Lou Paskalis from AJL Advisory, a marketing consultancy firm.
The main analyst at Insider Intelligence, Jasmine Enberg, points out that you don't have to be a social media specialist to realize that openly criticizing advertisers and businesses that fund X's operations is not beneficial for the company.
Is it possible for X to become bankrupt?
What resources does Musk have if the advertisers permanently leave?
During my interview with him in April, it was evident that he realized that X's subscriptions wouldn't supplant ad revenue.
"If you have one million subscribers each paying roughly $100 annually, that equates to $100 million. Compared to advertising, this is a relatively minor source of income," he informed me.
Twitter made approximately $4 billion from advertising in 2022. However, Insider Intelligence predicts that this figure will decrease to $1.9 billion in the current year.
The business has two significant expenses. The initial one is its payroll cost. Musk has already drastically reduced X, resulting in the dismissal of thousands of employees.
The loans Musk secured to purchase Twitter, amounting to roughly $13bn, are the second aspect. According to Reuters, the firm now has an annual interest payment obligation of around $1.2bn.
Should the business fail to cover the interest of its debts or manage to compensate its employees, indeed, X may indeed face bankruptcy.
However, this is a drastic situation that Musk would undoubtedly strive to steer clear from.
He has choices. The easiest course of action for Musk would be to invest more of his personal wealth, but it seems that he's not inclined to take that route.
Musk has the option to revisit the terms with the banks to seek less burdensome interest payments. For instance, he could request for "payment in kind" interest, which allows for payments to be postponed.
If attempts at renegotiating fail and the banks are unable to recover their funds, bankruptcy might be the sole resort. At this stage, the banks may advocate for a shift in leadership.
"Things would become highly chaotic and complicated," states Jared Ellias, a law instructor at Harvard Law School. "Moreover, it would be incredibly difficult. It would generate a significant amount of news as he would frequently be subpoenaed and required to appear in court."
This could be disastrous for Musk's professional standing and could also influence his future borrowing capacity.
In a situation of bankruptcy, would X just cease to function?
Ellias expresses his skepticism, stating, "That's quite difficult to accept." He suggests that such a scenario would only occur if Elon chooses to unexpectedly withdraw. However, even in that case, the lenders would still possess the right to force the company into bankruptcy, ensure a trustee is designated, and restart 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 undoubtedly making efforts.
He has kicked off a fresh audio and video call platform. The previous month, he broadcasted live while engaging in video games – he aspires that X can rival applications such as Twitch.
His desire is for X to evolve into an "all-in-one app", encompassing all features from messaging to digital transactions.
The New York Times obtained the presentation Musk was showing to investors last year. In it, he projected that X would generate $15 million through a payment business in 2023, with a substantial increase to approximately $1.3 billion by 2028.
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Check out: Elon Musk's surprising BBC conversation… summed up in a minute and a half (April 2023)
X possesses an enormous amount of data, and its extensive collection of dialogues can be utilized for training chatbots. Musk is of the opinion that this data holds great value.
Thus, X does possess potential.
However, in the immediate future, none of these alternatives fill the gap left by advertisers.
This is why Musk's vulgar tirade was so puzzling to numerous people.
"Paskalis admits, "I lack any sensible theories. He has a financial strategy in his mind that I just can't grasp."
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