Is it possible for X to face bankruptcy under Elon Musk's leadership? Elon Musk's vulgar criticism towards advertisers who are boycotting X, previously recognized as Twitter, has left specialists perplexed. If the trend of advertisers departing and not returning continues, will X be able to remain operational?
In April, I had the first of numerous disordered discussions with Musk regarding his purchase of X.
He made a comment that, looking back, was quite insightful, but I didn't grasp its significance in that moment.
He mentioned advertising, stating: "The fact that Disney is happy to promote their kids' films [on Twitter], and Apple is at ease advertising their iPhones, suggests that Twitter is a suitable platform for advertising."
After a span of seven months, Disney and Apple have ceased their advertisements on X – and Musk is directing harsh words at the companies that have departed.
The businesses halted advertising following an inquiry by a U.S. entity, Media Matters for America, which highlighted ads being displayed alongside pro-Nazi content. X vehemently disputed the findings, cast doubt on its research techniques, and initiated legal proceedings against the entity.
During a heated discussion on Wednesday, Musk also mentioned the term "b" word – bankruptcy, indicating the severe impact the ad boycott is having on the company's financial health.
The idea of bankruptcy may seem absurd for a business he acquired last year for $44bn (£35bn). However, it's not out of the realm of possibility.
To comprehend the reason, it's necessary to examine how dependent X is on income from advertisements – and why advertisers aren't returning.
While we don't possess the most recent data, approximately 90% of X's income came from advertising last year. This is the core aspect of the business.
Musk strongly implied this on Wednesday.
"He stated that if the business collapses… it would be due to an advertising boycott, which would lead to the company's bankruptcy."
The Chief Client Officer of Ebiquity, a marketing consultancy that collaborates with numerous firms, Mark Gay, indicates that there is no indication of anyone coming back.
"He asserts that the funds have been withdrawn and no one is devising a plan for reinvestment there."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 ceased its advertisements on X.
During his interview at the New York Times DealBook Summit on Wednesday, Musk responded to advertisers who left X in a way that caused discomfort. He then made another remark that further unsettled the advertisers.
"Hello Bob", he greeted, referring to Disney's CEO, Bob Iger.
Lou Paskalis, from AJL Advisory, suggests that when Musk targets top executives in such a manner, they will be even more hesitant to engage with X.
The main analyst at Insider Intelligence, Jasmine Enberg, says that one doesn't need to be an expert in social media to realize that openly and personally criticizing advertisers and firms that fund X's operations will negatively affect the business.
Is it possible for X to really become insolvent?
If there are no advertisers permanently, what resources does Musk possess?
In my April interview with him, it was apparent that he comprehended that subscriptions on X wouldn't be a viable substitute for ad revenue.
"If a million individuals subscribe for, hypothetically, around $100 annually, that equates to $100 million. This is a relatively modest income compared to advertising," he explained.
Twitter made approximately $4 billion in advertising earnings in 2022. However, Insider Intelligence predicts a decrease to $1.9 billion for this year.
The firm has two substantial expenditures. The initial one is its payroll expenses. Musk has already drastically reduced X, resulting in the dismissal of thousands.
The subsequent obligation involves managing the debts Musk incurred from purchasing Twitter, which amounts to roughly $13 billion. As per Reuters' reporting, the company is now required to make annual interest payments of approximately $1.2 billion.
Should the business fail to cover its loan interest or meet payroll expenses, indeed, X might truly face bankruptcy.
However, that's a drastic situation that Musk would undoubtedly wish to steer clear of.
He possesses alternatives. The easiest course of action for Musk would be to invest more of his personal wealth, but it appears that he isn't keen on that idea.
Musk might consider renegotiating with the banks to reduce the burden of interest payments. For instance, he could propose a "payment in kind" interest model, which would postpone payments.
If the re-negotiation process fails and the banks are unable to recover their funds, bankruptcy may be the only solution. In such a situation, the banks might attempt to instigate a shift in leadership.
"Things could get incredibly complicated and chaotic," suggests Jared Ellias, a legal academic at Harvard Law School. "It would also present a substantial challenge. There's no doubt it would generate substantial publicity as he would continuously be subjected to deposition and required to provide testimony in court."
This may severely damage Musk's professional standing, and it could also influence his ability to secure loans in the future.
In a situation of bankruptcy, would X just cease to operate?
Ellias expresses his skepticism, stating, "It's quite difficult for me to accept that." He continues, "If such an event occurred, it would only be because Elon chose to abruptly withdraw. However, even in that scenario, the lenders could force the company into bankruptcy, appoint a trustee, and restore operations," he adds.
What's Musk's next move?
The clear answer to these issues for X is to quickly identify a new source of income. Musk is undoubtedly making efforts.
He has initiated a new service for audio and video calls. Last month, he broadcasted himself playing video games, with the aspiration that X can rival applications such as Twitch.
He desires for X to evolve into an "all-in-one app", encompassing everything from messaging to digital transactions.
The New York Times obtained a presentation Musk was showing to investors last year. It revealed that X was projected to earn $15m from a payment business in 2023 and anticipated this to increase to roughly $1.3bn by 2028.
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Check out: A surprise BBC interview with Elon Musk… condensed into 90 seconds (April 2023)
X possesses a significant amount of data and can use its extensive collection of dialogues to educate 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 gap left by advertisers.
This is why many found Musk's vulgar tirade so confusing.
"Paskalis admits, "I lack any logical theories. He has a profit structure in his mind that I just can't grasp."
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