Why is Musk buying Twitter and if his aim is to turn a profit will he succeed?

Published On: April 28, 2022Categories: Latest News7.5 min read

Nobody is entirely sure what the driving motivation behind Elon Musk’s $44 billion bid for Twitter is. The popular opinion is that the acquisition, which seems set to go through after Twitter’s board failed to attract a better offer than Musk’s before reversing its previous stance to recommend shareholders accept the $54.20-a-share, is an ego trip.

Musk is the richest man in the world with a net worth estimated at around $265 billion. He was born into a wealthy family but made his own much larger fortune as a serial entrepreneur. While still teenagers, Elon and his brother Kimbal who is one year his junior, founded Zip2, an online city guide that provided content for the new online versions of The New York Times and the Chicago Tribune newspapers. It was sold in 1999 to Compaq for $307 million, netting the elder Musk brother $22 million.

Elon made another $180 million when PayPal, the payments solution he became a co-founder of after it merged with his next start-up X.com, an online financial services and email payments company, was sold to eBay for $1.5 billion. He is also the co-founder of the satellites launch and space exploration company SpaceX, neurological research company Neuralink, and tunnelling firm The Boring Company. Twitter will soon be added to that list.

But most of Musk’s fortune is tied up in his 17% stake in the electric cars company Tesla, which is worth over $900 billion despite losing 27% of its value so far this year as part of a general sell-off of growth companies.

While certainly not likely to ever need to borrow a fifty, Musk is not as cash-rich as his net worth might suggest. Most of his vast wealth is tied up in his Tesla stock and ownership stakes in the rest of the portfolio of companies he is co-founder or founder of.

The $21 billion he is putting towards the Twitter buy-out, with the rest financed by debt put up by a group of 12 investment banks and a loan taken out against his Tesla stock, is far from inconsequential in terms of his personal liquidity.

Musk’s public utterances suggest, or are designed to suggest, his primary motivation in taking Twitter private is utilitarian. He is a keen user of the microblogging platform and one of its biggest draws with 86.2 million followers. But he has also been highly critical of it, accusing Twitter of stifling free speech by banning users whose utterances or political positions it disagrees with, such as former U.S.-president Donald Trump.

Musk describes himself as a “free speech absolutist” and has publically decried Twitter’s content moderation policies, arguing it needs to be a genuine forum for free speech and describing its role as a digital “town square”.

While his political and societal beliefs, and ego, have almost certainly played an influential role in attracting Musk to Twitter, he is also very much a shrewd businessman and avowed capitalist. You don’t become the world’s richest person otherwise.

And Musk has also been critical of how Twitter is run as a business, accusing its current board and executive management of failing to deliver value for shareholders. He has already stated how he believes the company’s premium Twitter Blue subscription, currently available in the USA, Canada and Australia, needs to be overhauled. But Twitter generates most of its revenue from digital advertising and that is unlikely to change drastically.

Twitter has always struggled to monetise as effectively as other social media platforms like Facebook, Instagram, the professional network LinkedIn, and more recently TikTok. The platform’s microblogging format may be less suited to the digital advertising free-to-use social media generate most of their revenues from. Or successive management teams may simply have failed to unlock Twitter’s revenue potential.

Founder Jack Dorsey never seemed hell-bent on maximising the company’s earnings and was forced out of the company in 2008 as he was considered to lack the skills to run a major company. He subsequently returned as executive chairman in 2008 and left the company again late last year.

His second departure was, he insisted, entirely his own decision (he is also CEO and co-founder of the payments giant Square) but he had come under mounting pressure from investors to improve returns. Despite being one of the world’s highest profile social media platforms, Twitter has failed to make a profit during most of its time as a public company and last year posted a $221 million loss.

Last year Twitter’s advertising revenue was $4.5 billion, compared with more than $209 billion at Google’s owner Alphabet and $69.7 billion at Facebook-owner Meta.

His anointed successor Parag Agrawal was previously Twitter’s chief technology officer rather than an executive with a proven commercial track record, a move which again highlighted Dorsey’s priorities as less revenue-focused than most tech moguls. Musk is expected to make firing Agrawal, in the job for less than six months, one of the first items on his Twitter to-do list.

He will presumably have a lot of his own ideas as well as hiring a new chief executive of a more commercial profile tasked with improving Twitter’s profitability. So what could Musk be expected to do to ensure he realises a return on his investment as well as positioning himself as the world’s free speech champion? And how likely is he to succeed?

Twitter earns 90% of its revenue from digital advertising and its growth relies on “monetizable daily active users” who see ads served by the platform. It had around 217 million daily users at the end of last year compared to 152 million two years earlier. It’s not a bad growth rate but doesn’t compare well to other digital platforms over the Covid-19 pandemic.

Twitter’s current revenues will barely service the $25.5 billion of debt financing Musk is taking out to complete the acquisition. If he wants to treat it as a genuine business venture and not just an expensive hobby, revenues will have to grow markedly. How could that be done?

One option would be to attract many more users to a premium service. Twitter Blue currently costs $3 a month but doesn’t offer a really convincing case with benefits limited to an ‘undo’ button and ad-free articles. Musk wants to reduce the fee to $2 a month paid for 12 months upfront and give premium users a ‘blue tick’ on their profile.

More premium users will reduce Twitter’s reliance on advertising revenue, which Musk has also commented limits a company’s ability to take independent decisions not overly influenced by commercial need. But will enough users be willing to pay for an edit button allowing them to redact tweets once sent, a blue tick on their profile or an ad-free experience when ads are in any case not overly intrusive?

Musk has also said he will prioritise the removal of ‘bots’ on the platform, automated accounts that push political and social narratives. While that would undoubtedly improve Twitter, which could indirectly contribute to revenue potential in the long term, it’s unlikely to move the financial needle much, especially in the shorter term.

Another new way Twitter could monetise would be to sell its data to corporate buyers. While Twitter’s user numbers are lower than other big social media like Instagram, Facebook and TikTok, they also tend to be influential, especially in sectors like tech, media and finance. Packaged the right way, Twitter data offering insights into different sectors and demographics could be valuable if it doesn’t lead to a backlash from users.

Musk has also said he wants people to be able to say whatever they like on Twitter, turning it into a bastion of free speech. But that users will also have to be linked to real people and not hide behind pseudonyms.

At first glance, that sounds like an injection of accountability that could clean up a lot of the bots and trolls that have given the platform a bad name in the past. But critics say it will also mean a loss of voice for groups like political dissidents who would not be able to speak freely for fear of real world retribution if their accounts are linked to them directly.

Dropping the threat of a ban for certain opinions and utterances and platform rule breaking instead being punishable by a temporary ‘time out’ could inject fresh life into Twitter as a platform for the vigorous exchange of points of view. But there are also fears a lack of moderation will lead to a descent into chaos and put advertisers off.

Musk could also cut expenses like the company’s San Francisco HQ he recently said “nobody visits anyway”, in a criticism of Twitter’s policy of allowing staff to work from wherever they choose to. And less directly, he could see the platform as a potentially hugely valuable opportunity to market Tesla to its 217 million daily users.

Jean Burgess, professor at the Queensland University of Technology and author of Twitter: A Biography has commented:

“I think it’s worth $44 billion to Elon Musk, not because it has any prospect of making an increased profit, but because it secures him control over a platform that has been vitally important to the inflation of his own brand and his companies’ market capitalisation.” 

Lorne Daniel, a tech analyst at finnCap Group, is quoted as commenting:

“Twitter is one of those businesses providing almost like a public service, but the commercial scenario has been far from clear over the last few years.”

Musk probably genuinely believes he can help turn Twitter into a more profitably business. He is neither short of confidence or a track record of proving sceptics wrong. But Burgess may also have hit the nail on the head. Regardless of whether or not Musk is able to achieve a direct return on investment on his $44 billion, the price tag could make business sense to him and his business empire in other ways.

About the Author: Jonathan Adams

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