Is it possible for X to go insolvent under Elon Musk's leadership?
Musk's vulgar tirade directed at advertisers who are boycotting X, previously identified as Twitter, has left specialists perplexed. If these advertisers continue to withdraw and fail to return, does X have a chance of survival?
In April, I had my first conversation with Musk, one of many disorganized interviews about his purchase of X.
He made a comment that, looking back, was quite insightful, but I didn't catch its significance in the moment.
He discussed advertising, stating: "When companies like Disney are confident to promote their children's films and Apple is happy to advertise their iPhones on Twitter, it suggests that Twitter is an effective advertising platform."
Half a year plus one month down the line, Disney and Apple have ceased their advertisement on X – and Musk is advising businesses that have departed to "Go [profanity] yourself."
The firms halted advertising following an inquiry by a US entity, Media Matters for America, which highlighted ads showing up alongside pro-Nazi content. X strongly objected to the report, scrutinizing its research approach, and initiated legal action against the organization.
During a heated discussion on Wednesday, Musk mentioned the term "bankruptcy," indicating the significant impact the advertising boycott is having on the company's profitability.
It may seem implausible for a business that was acquired for $44 billion (£35bn) last year to go bankrupt. However, it's not entirely out of the question.
To comprehend the reason, you must examine how dependent X is on income from advertisements – and why advertisers aren't returning.
Even though we lack the most recent data, approximately 90% of X's income was generated through advertising last year. This is the core aspect of their business.
Musk strongly suggested this on Wednesday.
"He declared that should the company go under, it would likely be due to a boycott from advertisers leading to bankruptcy."
Mark Gay, the primary customer officer at Ebiquity, a marketing consultancy firm that collaborates with numerous businesses, indicates that there are no indications of anyone coming back.
"He says that the funds have been withdrawn and there's no plan being formed for re-investment."
Walmart, the retail behemoth, declared on Friday that it has ceased its advertising on X.
During his discussion 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 a comment that caused even more unease among the advertisers.
"Hello Bob," he addressed, making a nod to Disney's CEO, Bob Iger.
When Musk targets CEOs in this manner, they become more hesitant to associate with X, according to Lou Paskalis from AJL Advisory, a marketing consultancy firm.
The main analyst at Insider Intelligence, Jasmine Enberg, asserts: "One doesn't need to be a social media specialist to realize that openly and personally criticizing advertisers and firms that finance X's operations would be detrimental for business."
Is it possible for X to go bankrupt?
Without advertisers, what resources does Musk possess?
During our conversation in April, it was evident he comprehended that X's subscription revenue wouldn't supplant the funds generated from advertising.
If you have one million subscribers paying roughly $100 annually, that totals $100 million. However, compared to advertising, this is a relatively minor source of income," he informed me.
Twitter's ad earnings were approximately $4 billion in 2022. However, according to projections by Insider Intelligence, it's expected to decrease to $1.9 billion this year.
The company has two significant expenditures. The first one is its payroll expenses. Musk has already substantially reduced X by dismissing thousands of employees.
The subsequent obligation involves the repayment of loans that Musk borrowed for the purchase of Twitter, amounting to roughly $13bn. According to Reuters, the company is now required to make annual interest payments of around $1.2bn.
Should the business be unable to cover the interest on its debts or pay its employees, indeed, X may indeed face bankruptcy.
However, such a drastic situation is something Musk would certainly wish to steer clear of.
He possesses alternatives. Undoubtedly, the easiest course of action for Musk would be to invest more of his wealth – however, it seems as though he's not keen on this idea.
Musk might attempt to renegotiate with the banks for less burdensome interest payments. For instance, he could request for "payment in kind" interest, which involves postponing payments.
If renegotiation fails and the banks aren't able to recover their funds, bankruptcy might be the sole alternative. In such a scenario, the banks may advocate for a shift in leadership.
"Handling this would be quite chaotic and intricate," states Jared Ellias, a law professor at Harvard Law School. "And it would be incredibly demanding. It would generate a significant amount of news as he would be continuously subpoenaed and required to provide testimony in court."
This could significantly damage Musk's professional standing, and it could also affect his future borrowing capabilities.
In a situation where bankruptcy occurs, would X just cease to function?
Ellias expresses skepticism, stating, "That seems highly unlikely to me. If such a scenario occurred, it would only be because Elon intentionally destabilized things. Even so, if he chose to take that path, the company's creditors could still force the company into bankruptcy, have a trustee assigned, and restore operations," he explains.
What's Musk's next move?
The apparent answer to all these issues for X is to swiftly identify a new source of income. Musk is certainly making an effort.
He has initiated a new service for audio and video calls. The previous month, he broadcasted live while playing video games, aspiring that X can rival platforms such as Twitch.
He desires for X to transform into an "all-in-one app", encompassing all features ranging from messaging to digital transactions.
The New York Times reported that they obtained the presentation Musk gave to investors last year. In this, he predicted that X would generate $15 million in 2023 from a payments venture and that this figure would increase to around $1.3 billion by 2028.
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Check out this surprising BBC interview with Elon Musk, condensed into 90 seconds (April 2023).
X possesses a vast amount of data, with its extensive record of dialogues that can be utilized for training chatbots. Musk is of the opinion that this data holds immense value.
Thus, X indeed possesses potential.
However, for now, none of these alternatives fill the gap left by advertisers.
That's why Musk's vulgar tirade left many perplexed.
"Paskalis admits that he doesn't possess any logical theories. He believes there's a profitable scheme in his mind that he just can't grasp."
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