Elon Musk may be the richest person in the world, but he still needs investor money to buy Twitter for $44 billion. The CEO (and largest single shareholder) of Tesla has promised to take the social media company private in a deal that values Twitter at a 38% premium to its share price. Musk is using $21 billion of his own cash, $13 billion in loans and $6.25 billion in loans against Tesla shares.
So far, Musk has revealed few details about how he will boost Twitter’s profitability. (Twitter has only managed to post a quarterly profit a few times since 2018.) Most of the changes prioritize “free speech” by restricting or removing content rules, or increasing subscriptions over advertising. In a pitch deck shown to investors in recent weeks, according to the New York Times, Musk has said he will reduce Twitter’s reliance on ads to less than 50% of revenue (up from 90%), while quadrupling Twitter’s user base and revenue to $931 million and $26.4 billion, respectively. , by 2028.
The lack of details on how to do this has not dampened interest in the deal. The CEO of Binance, a cryptocurrency exchange, said that he was eager to invest $500 million in the Twitter deal alongside Musk. “We, from our friends, heard that [Musk] I was looking for outside investors, and are we interested? We immediately said that we are,” Changpeng Zhao told the financial times. “He didn’t have a plan for Twitter. There’s, like, a business plan. So it wasn’t that kind of discussion.”
Eighteen investors, including venture capital firm Andreessen Horowitz, Oracle CEO Larry Ellison, Binance and a Qatari sovereign wealth fund, will contribute $7 billion along with debt financing from banks including Morgan Stanley to fund the project. deal, according to a May 5 regulatory filing.
If Musk hopes to make a return on his investment, he’ll need to give users, advertisers and potential future shareholders a reason to believe in Twitter’s future. Fortunately, Musk has made a corporate change before.
Twitter’s master plan?
When Musk joined Tesla in 2004, he began planning the future of the beleaguered electric car company. In Musk’s 2006 blog post, “Tesla Motors’ Secret Master Plan,” he summed up his strategy in just four lines:
- build sports car
- Use that money to build an affordable car
- Use that money to build an even more affordable car
- By doing the above, also provide zero emission electric power generation options.
A similar four-step plan for the social media company could be guessed from Musk’s public comments on Twitter.
- Define what freedom of expression means
- Introduce new advertisers and retain existing ones
- Make Twitter private and build tools and products
- Make Twitter public again and take it to the moon
Let’s break it down.
Define what freedom of expression means
Freedom of expression normally protects citizens against governments, not against private companies. So when Musk says he wants free speech on Twitter, it’s not entirely clear what he means. Generally speaking, Musk has said that Twitter is a censorship entity that has too strict rules about what its users can post on the platform.
But Twitter needs rules (Musk, at least in theory, has adhered to this), without which it would probably be riddled with spam, hate speech, and porn. These rules not only guide users on how to behave online and point out company ethics, but are also vitally important to advertisers evaluating whether and how to spend their marketing budgets on Twitter amid a sea of rival platforms. Clarifying what free speech means will be a business imperative: Without a clear picture of what user-generated content is allowed on Twitter, advertisers will simply avoid, if not boycott, objectionable policies.
Target advertisers and keep existing ones
Musk says he wants to reduce Twitter’s reliance on ads, tweeting that he “hates advertising” in 2019, but this says more about his future commitment to alternative revenue streams than it does about advertising. The company earned $4.5 billion from advertising in 2021, 89% of its annual revenue.
Assuming the ads stick, there are two dynamics at play here: First, big companies want to appear socially conscious. In 2020, amid global Black Lives Matter protests, more than 1,000 businesses pulled their ads from Facebook due to what they saw as a relaxed company stance on hate speech. And a similar ad boycott targeted YouTube for its hate speech policies in 2017. While neither ad boycott lasted very long, Twitter has a relatively small user base, compared to Facebook and YouTube, and may be more easy for big advertisers to stay away.
The second dynamic is about adjacency. Advertisers don’t want their ads to be next to spam, hate speech, harassment, pornography, manipulated media, misinformation, or other types of content that Twitter prohibits or restricts. It’s not just a moral issue: When advertisers left Facebook, though most eventually returned, companies like Snapchat and Pinterest immediately benefited, in part because of its image as a safer environment for advertisers.
In recent years, Twitter has instituted stricter rules on disinformation, hate speech, and manipulated media. If Musk can convince advertisers that Twitter doesn’t support hate and that his ads won’t be placed next to problematic user posts, then he has a chance of succeeding without a radical transformation of the business model.
Make Twitter private and build tools and products
Once Musk appeases advertisers, he can use the company’s new status as a private entity, meaning it doesn’t have quarterly financial reports, to invest heavily in a different type of company.
Twitter can spend money on three different revenue streams: advertising (building better ad products and measurement tools), subscriptions (expanding Twitter Blue’s feature set for paying users), and creator tools (adding new ways for creators to of content earn money on the site). , of which Twitter can take a part). If Musk wants to reduce Twitter’s reliance on ad revenue, he can focus on subscriptions and creators.
The Times report indicates that Musk plans to make $15 million in so-called financial payments in 2023 and $1.3 billion by 2028 without clarifying how he would achieve it. Musk (who founded X.com, an online bank that eventually became PayPal, in 1999) could introduce a peer-to-peer payment system like PayPal’s Venmo or Square’s Cash app on the platform. (Facebook currently supports payments through its Messenger and WhatsApp products, but doesn’t charge fees.)
Musk also says he wants to hire engineers, who can build the products he showed off in the preview. in a cheep On May 6, Musk said that if the Twitter deal goes through, it will focus on hiring “software engineering, design, information security, and server hardware.” Musk, however, did not specify what those engineers or designers would be working on, or why he feels Twitter needs better servers and security.
Make Twitter public again and take it to the moon
“Meme stocks” derive most of their value from hype rather than proven earnings potential or future expectations. GameStop, which saw its stock price skyrocket from $18 to $325 in a matter of weeks when retailers on Reddit and Discord ran a small squeeze in January 2021, is the most visible example, along with AMC Entertainment, Blackberry, Bed Bath & Beyond, publicly traded companies driven by retail investors despite shaky fundamentals.
Musk knows the power of a public persona on social media. After taking Tesla public in 2010, his Twitter account helped make it one of the most popular stocks for retail investors, creating a template for future meme stocks. “I think people are recognizing that Elon Musk has created a lot of value for his companies by being unhinged on Twitter,” says Matt Levine, a finance writer for Bloomberg, in a recent interview with the new yorker. AMC CEO Adam Aron now caters to his social media presence for his stock-trading fan base.
If Musk takes Twitter public again, he’ll likely have legions of retailers ready to invest in Twitter and take it, as they say, “to the moon.” Financial data firm Vanda Research ranked Tesla as the second most popular stock for retail, behind only Apple, during the first week of May.
Once Twitter goes public again, investors will be able to look under the hood and see if Musk has improved Twitter as a business after all.