By Siddharth Pai
The ongoing saga at Twitter has all the ingredients for good drama. First, there was the en masse firing of senior executives at Twitter, as well as voluntary departures. This followed a chaotic acquisition process, after Elon Musk—a self-proclaimed ‘free speech absolutist’—said earlier this year that he wanted to take over the company so that there was a platform for free speech that would be accessible to everyone.
Twitter has been the darling of many public figures, including former US president Donald Trump, who had about 77 million followers in the US and about 24 million in India, according to Statista. A 140-character short-message platform, which also allows links to other media, Twitter has become enormously popular over the last few years.
Musk’s offer represented a 20% takeover premium over the current market price of Twitter. In fact, the offer was 54% over what the shares had been trading at before Musk started earlier this year to corner a large portion of Twitter’s shares. He is himself an ardent user and has more than 114 million followers on the platform. He wanted to turn it into a privately-held firm, away from the public market’s glare, to allow all comers an unrestricted soapbox on the platform.
There was speculation that Musk might allow Trump back on what used to be the former US president’s favourite soapbox. Trump was banned for life some time ago. After his ban, and independent of Musk’s intentions, there was even talk of a rival platform being formed as an answer to the ban—to allow Trump and his followers a similar medium for broadcasting their views.
In stepped Musk, the knight in shining armour. Things started to go awry for the acquisition almost as soon as the Tesla boss announced his intent. Twitter’s board unanimously adopted a poison pill through a ‘shareholder rights plan’ which would reduce the likelihood that any single entity or person gains control of the company through open market accumulation. Then, Musk’s offer, based on debt, ran into issues as the collateral he was putting up in the form of his Tesla shares began to lose value.
After a protracted period of back and forth, when Musk seemed to be backing off from his intent, the acquisition was finally consummated recently. The debt-based deal immediately plunged Twitter into a different balance sheet position. According to The New York Times, ‘last year, Twitter’s interest expense was about $50 million.
With the new debt taken on in the deal, that will now balloon to about $1 billion a year. Yet the company’s operations last year generated about $630 million in cash flow to meet its financial obligations. That means that Twitter is generating less money per year than what it owes its lenders. The company also does not appear to have a lot of extra cash on hand. While it had about $6 billion in cash before Musk’s buyout, a large portion of that probably went into the cost of closing the acquisition.’
This analysis didn’t consider the fact that Twitter made an approximately $810 million-dollar payment to settle a class action lawsuit in December 2021, without which its cash flow from operations would have been in the neighbourhood of $1.4billion. (The settlement was for having allegedly deceived investors in 2015 about user engagement metrics.) Nonetheless, as The New York Times piece says, the company’s cash position today is tenuous, and as such, it isn’t surprising
that Twitter would want to look for new revenue streams. This is especially true given the macro-environment, where it seems as if digital advertising streams are beginning to slow to a trickle, thereby also affecting other firms that rely heavily on digital advertising such as Facebook’s parent Meta and Google.
This need for more top-line resulted in a curious side-show over the last few days as Musk began a search for micro-revenue streams (read revenue from users) rather than relying largely on advertising revenue. Apart from the worsening macro environment, some advertisers have misgivings about Musk’s management style and top management shuffle-outs at Twitter. So, the user-driven revenue streams have suddenly become more important.
These revenue streams are simple: They are user subscription models. Last weekend, there were rumours, and ‘leaked’ reports, that Twitter would start charging $20 per month for users to have “Bluechecks”. Bluechecks are small, blue-coloured tick signs that show that the said account—usually of public interest—has been verified by Twitter as genuine. This typically includes accounts maintained by users in acting, government, music, politics, religion, journalism, media, sports, business, and other areas of public interest. Needless to say, earning the Bluecheck allows a user’s account to grow faster since the verification badge sends a signal that your content is more reliable, since you have gone through Twitter’s criteria to certify you as an authentic—and ‘noteworthy’ user.
There were grumblings that having to pay $20 for this status was out of line—since it is Twitter’s responsibility to make sure there aren’t counterfeit or impersonator accounts for ‘noteworthy’ users. It now appears that the $20 amount in the ‘leaked’ reports was bait. Musk has now switched the amount to $8, adjusted for purchasing power parity across nations. The switch to subscription services, which giants like Apple and Amazon made some time ago, isn’t surprising, except that it is paradoxical.
Unlike Apple and Amazon, it is actually these noteworthy users that provide Twitter most of its traffic! Now, Bloomberg reports that Twitter is calling many of its fired US employees back to work, saying it made a mistake—while simultaneously firing over 90% of its employees in India, a huge market.
Expect more drama.
The writer is technology consultant and venture capitalist