With Musk in charge, Twitter gets the blues

Photo: Reuters
Photo: Reuters

Summary

On the surface, it might seem like a mere social media fight over a status symbol. However, for Twitter, and for Elon Musk, it represents something deeper—a change in revenue model for a path to growth and profitability.

On 1 April, some parts of Twitter were abuzz with talks about the rollout of the social media platform’s new verification process. Legacy verified accounts would start losing their blue tick mark, as The New York Times did. Many public figures said they would not subscribe. On the surface, it might seem like a mere social media fight over a status symbol. However, for Twitter, and for Elon Musk, it represents something deeper—a change in revenue model for a path to growth and profitability. The next few quarters will give some sense of where this is going and whether Twitter can stem the slide it finds itself in.

1. Value Discount

Elon musk recently said Twitter would offer stock options to staff on a $20-billion valuation. That’s less than half the $44 billion he paid to buy Twitter in October 2022, and delist it. When listed, the last time Twitter quoted at a $20 billion valuation was in Q1 of 2020, and that too only briefly.

The lower valuation reflects the maelstrom Twitter has faced in recent months. When Musk first offered to buy Twitter in April 2022, Professor Aswath Damodaran, a valuation guru, pegged its value at $46 per share, $4 higher than the market price at that time, but below Musk’s offer of $54.20. Musk’s latest valuation is significantly lower.

However, it need not necessarily mean Twitter is in a weaker spot. Many early startups offer stock options at steep discounts, to benefit employees when the value goes up. In a mail to employees, Musk said he saw “a clear, but difficult, path to a >$250B valuation".

2. The Ad Slump

For all of Musk’s optimism, Twitter is staring at lower revenues right now, led by a drop in advertising revenues, which contributes about 90% of the total. Twitter’s total revenues have plunged 41%, from $5.1 billion in 2021 to $3 billion in 2022, according to a WSJ report. Advertisers such as Mondelez, Coca-Cola and AT&T paused their ads as they were concerned about the changes Musk was bringing in.

Twitter has had little success in wooing them back. Twitter earned $71 million in sales from its top 10 advertisers during September and October last year, before Musk’s acquisition. This has dropped to $7.6 million in the past two months, according to digital intelligence firm Sensor Tower, quoted by Bloomberg. While data licensing and other revenues increased to $100 million in Q2 2022 from $84 million in Q2 2018, it’s ads that drove the momentum, doubling to over a billion during the same period. Ads are, now, struggling.

3. Twitter Blues

Musk tried to reduce Twitter’s reliance on advertising revenues by launching Twitter Blue. For a monthly fee of $8, Blue subscribers would get a verified badge (so far offered free to some groups of people based on an internal process) and other benefits, including making longer tweets and higher discoverability. However, that has had limited success so far, earning just $11 million in mobile subscriptions in three months, according to Sensor Tower. According to researcher Travis Brown, Twitter has 254 million daily active users. Only around 475,000 are paid subscribers, 46% of whom have fewer than 1,000 followers, raising questions about their stickiness. This month, Twitter started to remove blue ticks from legacy verified accounts. Fewer than 6,500 of 420,000 legacy verified accounts opted to subscribe, as of last month.

4. Network Effect

Soon after Musk purchased Twitter, many started looking for alternatives to the social media platform. The hashtag #TwitterMigration started trending. Mastodon, a decentralized social network founded in 2016, seemed to be the most promising, even as those who migrated encouraged and hand-held others to find a home there. However, after surging to 2.6 million active users on 1 December, it dropped to 1.17 million in April. Even at its peak, Mastodon was a fraction of Twitter’s 254 million daily active users, which drew advertisers. Paying customers could be a bigger draw. Tom Sweeney, CEO of Epic Games, tweeted that “making a payment is a strong non-spam signal". Similarly, Nassim Taleb, who has criticized Musk in the past, tweeted, “charging for Twitter should bring cash flow and eliminate NOISE." Musk has indicated bigger ambitions for the platform, including putting it at the centre of users’ financial lives, possibly integrating payments and other financial services.

5. Cost Cuts

By the time Musk offered to take over Twitter, the company was facing two issues, financially. One, its revenue growth had flattened (even though it showed an uptick in 2021). Two, while it became profitable at the operational level in 2017, it showed little sign of sustained improvement, even as its employee count went up.

Musk went on a cost-cutting spree, slashing jobs and infrastructure costs. At a recent event organized by Morgan Stanley, Musk said he had cut non-debt expenditure to $1.5 billion (against $4.5 billion it would have incurred otherwise). Some of the fears around aggressive cost-cutting—like it could bring the platform down—seem exaggerated in retrospect. However, there are still concerns it might show up as lawsuits from disgruntled contractors, partners and employees. Musk’s big challenge of building a growing, profitable business remains.

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