Under Musk's leadership, can Twitter increase profits?

Tesla CEO Elon Musk recently officially acquired the social platform Twitter for $44 billion. Musk calls himself a "freespeech absolutist," but turning Twitter into a money-making platform where anyone can say anything will be a difficult process, in the eyes of experts.

Twitter is pivotal, but not profitable

Musk, the world's richest man, and social media platform Twitter announced on April 25 that they had completed a $440 acquisition agreement. The deal, which still has to be agreed by shareholders and regulators, would be one of the biggest acquisitions in the history of technology and could have a huge impact on the world in the coming years.

With about 217 million daily active users, Twitter is not the largest social media, but it has a significant place to shape the global discourse. Many political leaders use it as a channel for voice, and companies and celebrities use it to shape their image.

Still, even as Twitter plays a leading role in global politics and culture, it has only made occasional gains since it went public in 2013.

Immediately after the acquisition deal came out, the question was raised, could this lead to a brighter financial future for Twitter?

Musk has said that the economy is not his motivation for buying Twitter, and that he "doesn't care at all" about Twitter's profitability or revenue growth, but is more focused on strengthening the defense of free speech on the platform and making tweets more editable.

Musk said on TED Talk in April, "I strongly believe that having a public platform with maximum trust and broad tolerance is extremely important for the future of civilization."

Profit is not Musk's primary consideration

Twitter has been listed on the New York Stock Exchange for nearly 9 years and has seen a net loss every year except for profits of just over $1 billion in 2018 and 2019.

Musk's $44 billion acquisition of Twitter pales in comparison to Facebook's market capitalization of more than $500 billion. At the end of last year, Twitter claimed to have 217 million monetizable daily active users (mDAU) who were exposed to ads on the platform. That's a far cry from Facebook's 1.93 billion subscribers.

Twitter's revenue comes primarily from advertising, not from its user base. The user base is not enough to make up for its financial situation. Twitter announced its first-quarter earnings report on April 28, and although it achieved profits, its revenue did not meet expectations. However, the number of active users was higher than expected. Twitter earned 61 cents per share in the first quarter; revenue was $1.2 billion, lower than expected at $1.23 billion; and monetizable daily active users were 229 million, higher than expected at 226.9 million.

While Musk didn't give details about how he'll run his Twitter business, he has said he will reduce content moderation to a legal minimum and make money from subscriptions.

Carolina Milanesi, an analyst at Creative Strategies, said musk has not articulated the platform's vision beyond advocating for free speech, "He didn't say if Twitter has age issues, geographic differences, who are the biggest competitors... And what else does he think."

The debt burden is a hidden concern

Even though Twitter's business prospects may not be his biggest concern, Musk, the world's richest man, wants to at least not lose money, especially since some of the acquisition could come from his own money.

In a filing released in late April, Musk noted that a consortium led by Morgan Stanley provided $13 billion in debt financing; Morgan Stanley also provided $12.5 billion in margin loans, and $21 billion in Musk's personal wealth to back up the deal.

Musk has yet to elaborate on how he will increase Twitter's earnings in the future. However, he had suggested in a tweet that the price of the paid service "Twitter Blue" be lowered, that paid subscribers be granted certified accounts, and that their ads be removed. Twitter Blue currently charges $2.99 per month. But Musk later withdrew the tweet.

Musk intends to replace advertising with paid subscriptions to sustain Twitter revenue, but Colin Sebastian, an analyst at Baird Equity Research, a U.S. market research firm, said in a message to investors that it doesn't seem to work.

Changing the advertising revenue model is difficult for users to pay money

Sebastian said Musk seems to be proposing the idea of changing the advertising revenue model, "unless he's going to pay interest on his debt out of his own pocket, it's hard to believe that this will happen entirely."

Analysts doubt that when social media platforms such as Facebook are time-free, Twitter users will pay for paid content or retweet posts.

Another option in Musk's hands is to lay off employees, which may be in line with his desire to reduce content moderation on the platform.

By the end of 2021, San Francisco-based Twitter has 7,500 employees worldwide. According to a study by the New York University Business School, Twitter has about 1,500 moderators worldwide as of 2020.

Musk may also seek to accelerate user growth, thereby increasing advertising revenue, or adding new paid features to the platform.

Angelo Zino, an analyst at CFRA, a U.S. investment research firm, said, "He has his own plans. If he could keep a subscription-based offer and free option model, it might work."

A large part of Musk's acquisition of Twitter was borrowed by banks, so it would increase Twitter's debt burden. S&P Global Ratings, a global rating agency, has warned that it is considering downgrading Twitter's current BB rating.

Zeno noted that Musk may end up working with other investors so as not to take on the finances alone, "if he brings other good ideas in terms of fairness, then the likelihood of success will be greater."

(First image source: shutterstock)