Elon Musk is now the begrudging owner of Twitter. It’s a company he pursued relentlessly before deciding he was no longer interested after signing a $44 billion deal to acquire it. After staring down a difficult trial for backing out of the deal, he went ahead with the purchase at the original price, showing up at the company’s San Francisco headquarters on Oct. 26 to seal the deal.
But even before signing the original paperwork in April, Musk realized there was a problem: he couldn’t afford the $44 billion transaction without liquidating other assets such as Tesla stock. So the deal was predicated on outside financing: $12.5 billion in bank loans and $7 billion in equity financing from investors like Oracle’s Larry Ellison and the crypto firm Binance.
While Musk’s decision to take Twitter private means he no longer faces government-mandated financial disclosures, even the world’s richest man faces pressure from his financiers. Musk’s equity investors will eventually expect an exit (a sale or another public offering) even if they’re likely willing to be patient with Musk. (He ran Tesla for about five years before taking the company public and still has yet to take SpaceX public 20 years after starting it.)
But a group of banks led by Morgan Stanley is set to collect $1 billion in interest each year from Musk, according to Bloomberg’s estimates.
So far, new sources of cash at Twitter are scarce. Musk’s only novel publicly-disclosed revenue idea: charging verified users around $8 per month for a blue checkmark. The math behind that doesn’t seem to add up.
Twitter has always struggled to make money. The social media company recorded annual profits twice—in 2018 and 2019—over its nine-year history as a publicly traded company. In each of those years, it made more than $1 billion.
So far, Musk has discussed three strategies to transform Twitter’s fortunes. First, he’s reportedly laying off 3,700 employees, about half of the company’s 7,500 staffers. Second, he wants to maintain advertising revenue in the short term, asking advertisers to stay on the platform, while moving Twitter away from advertising revenue over the long-term and curbing content moderation that advertisers favor. Third, he wants to sell blue checkmarks.
Blue checkmarks are badges typically verifying the identities of public figures and trusted sources. Verified users (including companies, journalists, academics, government officials, and even Stephen King) may soon have to pay about $8 per month to join a new tier of Twitter Blue, Twitter’s subscription service which now gives paying customers additional features for $3 per month.
Unfortunately for Musk, the effort may not generate much cash. Musk would need more than 10 million users to pay for a blue checkmark merely to pay off the $1 billion in annual interest on debt incurred during the acquisition. Since even the highest estimates suggest only about 400,000 verified users exist on Twitter, that would only bring in $38 million per year (at $96 per year per user) if all of them signed up. The economics are even bleaker if Apple and Google take their 30% cut of all subscriptions paid for through their app marketplaces.
Yet getting 10 million people to pay for some sort of Twitter subscription isn’t an impossible task. There were about 238 million daily Twitter users as of July. It’s reasonable to expect some will want to pay for extra features. (I pay $3 per month currently for Twitter Blue because I like the undo tweet feature and the ability to customize the mobile app. I’m not sure if I’ll pay another $5 per month to keep my blue checkmark.)
Other revenue opportunities may emerge. Tipping has become popular on live-streaming websites like YouTube and Twitch. The online game Fortnite sells “skins” to its users eager to customize their avatars. Non-fungible tokens are popularizing the idea of buying stuff that only exists on the internet. Even the chat application Discord makes money by selling premium services such as quicker live-streaming speeds, custom avatars, and emojis through its Nitro subscription service (just under 1% of Discord’s 150 million monthly active users pay $5 or $10 per month for the service).
Musk may be eager to expand the commerce offerings on Twitter since the market is growing. Last year, about 102 million people in the US spent money on social media platforms, nearly double the number in 2019. In China, the amount spent on social commerce last year was 10 times greater than what was spent in the US. That’s an enticing prospect for Musk who said he wants to turn Twitter into an “everything app” like China’s WeChat, which is a central hub for messaging, payments, and e-commerce used by an estimated 1.2 billion people.
To succeed, however, Musk will have to convince a large chunk of Twitter users to start paying for something they’ve always used for free. That may be a tough sell, even for the world’s richest man.