Elon Musk has said a lot about making Twitter a free-speech zone, but little about how he’ll make it more profitable.
In fact, the world’s richest man has said he doesn’t care whether he makes money on his $44 billion purchase of the social media site. Other people do care, including banks that are lending Musk money and private equity funds and wealthy individuals who are investing alongside him.
As a business, Twitter needs fixing. It controls a meager 3% of the online advertising market, and it’s been criticized for slow user growth and subpar profit margins.
Twitter’s stock price was higher at the end of 2013, the year it went public, than it is now. It lost $221 million last year and $1.1 billion the year before that.
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Going private, by relieving pressure to meet quarterly earnings targets, can let managers make tough, transformative changes. In Twitter’s case, however, Musk is also adding $13 billion in debt.
The company’s annual interest bill will be about $1 billion, which is more than last year’s cash flow from operations.
“Taking the company private with so much leverage is not going to help it achieve long term success,” said Armando Gomes, associate professor of finance at Washington University’s Olin Business School. “This is going to make it very difficult to move away from the current business model.”
Twitter gets 90% of its revenue from advertising. Musk has mentioned ways to reduce that dependence, such as charging “a slight fee” to corporate and government users.
He also must realize, though, that his vision of Twitter as a freewheeling “virtual town square” could alienate advertisers. Big brands may stay away if the site becomes less diligent about policing hate speech, bullying and election lies.
Musk, an avid Twitter user whose tweets have sometimes gotten him in legal trouble, says his main goal is to improve the user experience. He wants to add an edit button, make direct messages more secure and eliminate spambots, which are automated accounts that send out large volumes of tweets.
James Fisher, professor of marketing at St. Louis University, isn’t sure that will attract more users. “There seems to be a contradiction” between eliminating content moderation and a better user experience, he said. “When you put a megaphone in everyone’s hands, there’s so much ugliness that comes out of that.”
Being indifferent to profits is in character for Musk, who famously says he didn’t have a business plan when starting PayPal, Tesla, SpaceX and other companies.
“He’s kind of a crazy genius, and maybe he’s thinking of this as a big experiment on the future of social connections,” said Perry Drake, an associate marketing professor at the University of Missouri-St. Louis. “Maybe it will be socially constructive, or maybe he will kill Twitter.”
It’s a bit far-fetched to think a social media site with 229 million daily users might somehow implode, but Gomes does see elements of danger in this deal. Higher interest rates will raise the cost of Twitter’s floating-rate debt, and advertising is a cyclical business.
If a recession were to hit, Musk could begin feeling pressure from his bankers. They could even force him to sell the Tesla shares that are collateral for some of his loans.
“This acquisition is creating a significant exposure for Elon Musk to a downturn scenario,” Gomes said.
Musk can say he doesn’t need to make a profit, but if he doesn’t turn Twitter around, his new debt will cause him a lot of grief.