Elon Musk may be the world’s richest person, but he still needs money from investors to buy Twitter for $44 billion. The CEO (and largest individual shareholder) of Tesla has promised to take the social media company private in a deal valuing Twitter 38% premium above the share price. Musk is using $21 billion of his own cash, $13 billion in loans, and $6.25 billion in loans against Tesla’s stock.
So far, Musk has revealed few details about how he will boost Twitter’s profitability. (Twitter has only managed to book a quarterly profit a few times since 2018.) Most of the changes prioritize “free speech” by curbing or eliminating content rules, or boosting subscriptions over advertising. In a pitch deck shown to investors in recent weeks, according to the New York Times, Musk has said he will cut Twitter’s reliance on ads to less than 50% of revenue (down from about 90%), while quadrupling Twitter’s user base and revenue to 931 million and $26.4 billion, respectively, by 2028.
A lack of details on how to do this has not dampened interest in the deal. The CEO of Binance, a cryptocurrency exchange, said he was eager to invest $500 million in the Twitter deal alongside Musk. “We, from our friends, heard that [Musk] was looking for third party 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 isn’t, like, a business plan. So it wasn’t that type 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 such as Morgan Stanley financing the deal, according to a May 5 regulatory filing.
If Musk hopes to turn a profit on his investment, he will need to give users, advertisers, and potential future shareholders a reason to believe in Twitter’s future. Luckily, Musk has executed a corporate turnaround before.
When Musk joined Tesla in 2004, he began plotting the future of the beleaguered electric car company. In Musk’s 2006 blog post, “The Secret Tesla Motors Master Plan,” he summarized 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
- While doing above, also provide zero emission electric power generation options
A similar four-step plan for the social media company could be divined from Musk’s public comments on Twitter.
- Define what free speech means
- Pitch new advertisers and retain existing ones
- Take Twitter private and build out tools and products
- Take Twitter public again and meme it to the moon
Let’s break it down.
Freedom of speech typically protects citizens against governments, not private companies. So when Musk says he wants free speech on Twitter, it’s not entirely clear what he means. Broadly speaking, Musk has said that Twitter is a censorious entity that has too many stringent rules about what its users can post on the platform.
But Twitter needs rules (Musk has, at least in theory, acceded to this), without which it would likely be full of spam, hate speech, and pornography. These rules not only guide users in how to behave online, and signal the company’s ethics, but they’re also crucially important for advertisers evaluating if 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 steer clear of, if not boycott, objectionable policies.
Musk says he wants to reduce Twitter’s dependence on ads—and famously tweeted that he “hates advertising” in 2019—but this says more about his future commitment to alternative revenue streams than anything about advertising. The company made $4.5 billion from advertising in 2021, 89% of its annual revenue.
Assuming ads stay, there are two dynamics at play here: First, large companies want to appear socially conscious. In 2020, amid the global Black Lives Matter protests, more than 1,000 companies pulled their ads from Facebook because of what they saw as the company’s lax stance on hate speech. And a similar ad boycott targeted YouTube over its hate speech policies in 2017. While neither ad boycott lasted very long, Twitter has a relatively small user base, as compared with Facebook and YouTube, and may be easier for large advertisers to stay away from.
The second dynamic is about adjacency. Advertisers do not want their ads next to spam, hate speech, harassment, porn, manipulated media, misinformation, or other types of content that Twitter bans or restricts. It’s not just a moral issue: When advertisers left Facebook—though most eventually came back—companies like Snapchat and Pinterest immediately benefited, in part because of their image as a safer environment for advertisers.
In recent years, Twitter has instituted more stringent rules about misinformation, hate speech, and manipulated media. If Musk can convince advertisers that Twitter doesn’t support hate and their ads won’t be placed next to problematic user posts, then he has a shot to succeed without a radical transformation of the business model.
Once Musk appeases advertisers, he can use the company’s newfound status as a private entity—meaning no quarterly financial reports—to invest heavily in a different kind of company.
Twitter can pour money into three different revenue streams: advertising (building better ad products and measurement tools), subscriptions (expanding Twitter Blue’s suite of features for paying users), and creator tools (adding new ways for content creators to make money on the site, from which Twitter can take a cut). 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 clarification on how he would achieve that. Musk (who founded X.com, an online bank that eventually became PayPal, in 1999) could introduce a peer-to-peer payments system like PayPal’s Venmo or Square’s Cash app onto 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 previewed in the pitch deck. In a tweet on May 6, Musk said that if the Twitter deal gets done, he will be focused on hiring for “hardcore software engineering, design, infosec & server hardware.” Musk, however, didn’t specify what those engineers or designers would be working on, or why he feels Twitter needs better servers and security.
“Meme stocks” derive most of their value from hype rather than proven revenue potential or future expectations. GameStop, which saw its share price soar from $18 to $325 in a matter of weeks when retail traders on Reddit and Discord executed a short squeeze in January 2021, is the most visible example, alongside AMC Entertainment, Blackberry, Bed Bath & Beyond, publicly traded companies boosted 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 feed helped make it one of the most popular stocks for retail investors, creating a model 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 Bloomberg finance writer Matt Levine In a recent interview with The New Yorker. AMC CEO Adam Aron now caters his social media presence for his stock-trading fanbase.
If Musk takes Twitter public again, he will have legions of retail traders likely ready to invest in Twitter and take it—as they say—”to the moon.” The financial data firm Vanda Research ranked Tesla as the second-most popular stock for retail trading, just behind Apple, for the first week of May.
Once Twitter is public again, investors will be able to look under the hood and see if Musk has improved Twitter as a business after all.