Twitter’s newly appointed ‘chief Twit’, Elon Musk, has always dreamed big. ‘He’s not like other people’ is the usual refrain to describe the uncompromising visionary with admirers and detractors in equal measure. Musk’s single-minded approach has served him well, so far. Whether a saviour or megalomanic, he is an entrepreneur with a track record of delivering on his extraordinarily bold claims. So perhaps instead of asking what Twitter will do next, it might be more apt to ask: what will Elon Musk do next?
After taking a wrecking ball to the company in early November 2022, laying off half its workforce in a bid to stem $4m-a-day losses, can Musk work his magic and turn Twitter into a profitable business by integrating payments and subscription services, all while simultaneously tackling misinformation and steering clear of regulators? If so, the question then becomes, where and how will the company expand?
Although Musk’s acquisition of Twitter has caused a media maelstrom, it wasn’t such an outlandish move in the context of Musk’s business history. Musk channels his personal belief system into business interests that propel him towards ludicrously ambitious goals: saving the planet with sustainable energy and electric car company Tesla; making humans an interplanetary species with his aerospace company SpaceX; and now a libertarian quest to save free speech by acquiring social media platform Twitter.
Despite the daily headlines around Musk’s Twitter acquisition, it is still unclear what the mercurial entrepreneur is to do with a financially ailing (yet highly influential) social media company. Was the acquisition an ideological quest to clean up the world’s ‘digital town square’; a clever business strategy in recognising that social influence is the engine of growth in the digital economy; or simply the richest man in the world wanting to say what he wants to his 114 million Twitter followers without the risk of censorship?
Twitter is losing money fast
Founded in San Francisco in 2006 by Big Tech pioneer Jack Dorsey and partners, Twitter quickly became a cultural phenomenon. Twitter’s draw for the chattering classes became undeniable, particularly when concerns arose around the platform’s influence in swaying the 2016 US presidential election.
Despite Twitter’s outsize influence, however, the social media platform has failed to live up to its business potential. Dorsey has since admitted he “grew the company too fast”, and by September 2021, investor disappointment saw the company settle a class action lawsuit by shareholders to the tune of $809.5m.
The company was accused of misleading investors over its growth prospects as far back as November 2014, promising 550 million monthly active users with a view to reaching the one billion mark in the longer term. By June 2022, the platform registered 238 million monthly active users. Alongside disappointing user numbers, company financials showed that while Twitter’s revenues had increased, the company had failed to become consistently profitable.
The company reported a net loss of $221.4m in 2021, an 80% reduction on the net loss of $1.14bn in 2020. Weak operational performance indicates a lack of focus by the company on cost management, according to GlobalData research.
Indeed, one of the first things Musk did as CEO early in November 2022 was to dissolve Twitter’s board, fire its senior management team and announce plans to eliminate about 20% of the company’s workforce. A couple of weeks later Musk leaned into this cost-cutting strategy by firing around half of Twitter’s 7,500-strong workforce and slashing the company’s infrastructure budget in half.
While the layoffs appear dramatic, they make sense in the broader context of Big Tech budget retrenchment. In November 2022, Meta announced 11,000 layoffs (13% of its workforce) while Apple and Amazon are pursuing hiring freezes as the era of a free lunch in Big Tech draws to a close. Alongside cost-cutting, reports have emerged of Musk promising investors that he would quintuple revenues to $26.4bn by 2028 and reach 931 million users. The question is: how exactly will Musk make Twitter profitable?
How will Elon Musk change Twitter's business model?
Although Musk’s reputation as disruptor is well earned, this time is different, according to GlobalData thematic research principal analyst Laura Petrone. “He [Musk] is entering the social media space at a time when social media companies have released a set of very disappointing results and the challenge to keep users engaged cannot be underestimated,” she says.
By all accounts Musk is set on moving Twitter towards a subscription-based business model to become less reliant on advertising revenue. This will be a tall order when considering that 92% of Twitter’s revenue was derived from advertising in 2021. In early November, Musk publicly admitted that Twitter had seen a “massive drop in revenue” in the wake of the acquisition due to activist groups pressuring advertisers.
However, Musk’s ideological aversion to advertisers and the current economic reality exist in stark opposition. The North American media market is forecast to reach $436.7bn by 2024, and advertising remains the largest segment of the media industry in North America, according to GlobalData research, accounting for 56.8% of the industry's total value, followed by broadcasting and cable TV (25.1%), publishing (11.4%) and movies and entertainment (6.7%).
On one level it makes sense not to be exposed to the vagaries of the current macroeconomic headwinds in which advertising budgets are quickly diminishing. Furthermore, increased regulatory scrutiny and privacy concerns around ad-targeting are encouraging social media companies including Meta and Google to diversify away from adverting business models.
“I struggle to see how Musk plans to reverse the fortunes of a company like Twitter with subscription revenue, which is just not enough to replace current advertising revenue,” says Petrone. Twitter doesn’t disclose its advertising revenue, but in such a competitive marketplace, with the ever-increasing challenge of engaging users, many industry experts such as Petrone believe it is a risky strategy. Indeed, so-called 'Twitter-killer' rival social media platform Mastodon has seen a surge in user numbers since Musk's acquisition and is positioning itself as a refuge for those dissatisfied with Musk's version of Twitter.
Petrone says Musk further risks upsetting both users and advertisers with his plan for a two-tier Twitter, which would give premium Twitter Blue members access to a verified service for $7.99 per month. The blue tick verification would, notionally, create a revenue stream while simultaneously tackling Twitter’s bot account problem and charges of spreading misinformation. However, it is still unclear how much value users themselves would get from this premium service.
“There has already been a public backlash from users not happy with this charging plan and advertisers boycotting the platform because of concerns about being associated with the content quality and the potential for misinformation – certainly in the West regulation and a move to tackle misinformation is under great scrutiny,” says Petrone. “It is a big gamble for Musk.” Indeed, GlobalData’s proprietary sentiment research demonstrates that public opinion turned far more negative for Twitter under Musk’s leadership.
While users in some developed markets may pay $7.99 per month, Petrone points out that this subscription-based model may prove unsustainable in developing markets – and that raises the question of what this will mean for Twitter’s global expansion plans.
What are Twitter's growth and expansion plans likely to be?
Musk’s public acknowledgement that he substantially overpaid for Twitter may indicate that he sees the potential value of Twitter in being a launchpad for something much bigger – an all-encompassing platform for everything, in the vein of Chinese tech giant Tencent’s WeChat, which serves as payments, ecommerce and social media platform rolled into one. Indeed, Musk has publicly hinted at the possibility of a super-app (aptly named AppX) and there is some speculation that it could involve the wholesale adoption of crypto and blockchain, for which Musk has been a long-time advocate.
True to form, he also publicly mused on the social media site whether "we can get 80% of humanity on Twitter". The WeChat super-app model is being copied across the world, with Meta leading the pack, according to GlobalData. Musk may see Meta’s lead as a challenge to win the race for the West's ubiquitous fully immersive Web3 'everything' platform.
As a first step, it appears Musk’s entrepreneurial history as an original co-founder of payments platform PayPal is guiding his business strategy for Twitter. While the widespread layoffs captured the news cycle on 4 November, Musk registered Twitter with the US Treasury to officially become a financial services business. which is a clear signal that he will be integrating payments services to the platform. Indeed, at a public address to advertisers a few days later, Musk mooted ideas including offering high-yield money market accounts, debit cards and peer-to-peer transactions as well as putting the whole of Twitter behind a paywall.
How will Musk grow Twitter's FDI in the long-term?
Twitter’s annual revenue is currently split relatively evenly between the US and overseas, making global operations and expansion critical to the company’s future. The company currently has 14 offices in North America, nine in Europe, ten in Asia and two in Latin America, in addition to one office in both Dubai and Sydney. However, weak operational performance could affect the company’s ability to pursue growth and expansion plans, according to GlobalData research.
Our foreign direct investment (FDI) projects database recorded 13 global greenfield investments by Twitter in 2021. This was after a period of no investments in 2019 and only a single investment in 2020. The company came out of the pandemic with an expansionist approach, according to Investment Monitor chief economist Glenn Barklie.
While the company was on an FDI growth trajectory before Twitter’s sale to Musk, he has clearly slammed the brakes on overseas investment. Musk’s cost-cutting announcements in early November 2022 extended to firing 90% of its 200-strong staff in India, much of them engineering and product employees – despite India being a growth market with a reported 55 million active Twitter users. The company also announced laying off all staff in its Ghana office – the only Twitter office in Africa.
A period of global retrenchment and cost-cutting will make any outward FDI by Twitter highly unlikely in the short term, says Barklie. “Musk is likely to focus on consolidation and cost-cutting first, which means there won’t be a proper discussion about FDI until the company is more stable,” he adds.
Down the line it is not clear whether Twitter’s global expansion plans will be driven by economic reasoning, ideological leaning or simply where Musk has successfully invested before, and Barklie notes that sometimes FDI location decisions are made simply on personal preferences about a location or a company’s historical links to a location. Barklie suggests that Tesla’s FDI expansion trajectory might lend some insight into Musk’s regional preferences for global investment, while noting that social media and automotives are two completely different industries.
From 2019 to 2021, Tesla’s FDI investment was greatest in China and Canada, registering 14 projects each, according to our FDI projects database. Canada is an important segment of the North American market and may prove a fertile investment location, building on Tesla’s well-established links with the country. China is strategically critical to Tesla’s success in a way that it may not be to Twitter but nonetheless raises questions about Twitter’s relationship with China.
The Chinese social media sector has been tightly guarded against foreign competition by Chinese authorities. TS Lombard China director Johnathan Fenby notes that Beijing has officially banned foreign-based social media services including Twitter, although it is used via government-approved virtual private networks by some officially approved spokespersons. Despite Musk's positive relationship with the leadership in Beijing, Fenby sees no prospect of Twitter being able to operate in China, or of meaningful foreign investment in social media being permitted. “The escalation of state control under Xi Jinping with the stress on national security runs in the opposite direction,” he says.
Perhaps more pertinent is the fact that Musk’s net worth is heavily dependent on Tesla’s success in China, sparking concerns that Chinese authorities will have some lever to influence Twitter, says TS Lombard chief China economist Rory Green. And while Beijing’s policy has involved rolling out the red carpet to foreign manufacturing companies with tax breaks, cheap land, and has even made Musk an exception to China’s foreign ownership regulations, Green is certain that Beijing will draw the line when it comes to social media platforms. Chinese authorities’ tight control of public information is critical to maintaining its regime, after all.
Concerns are being raised in Musk’s adopted homeland of the US. Reports have emerged of US policymakers calling for a review of Musk’s Twitter acquisition by the US Committee on Foreign Investment, which screens deals for national security concerns. “It is clearly on their radar,” says Green.
Musk may face scrutiny from US officials about any Chinese privileges arising from the Twitter deal, as well as scrutiny around how he funded the acquisition, with investment from suspect foreign sources such as the Qatari wealth fund, Chinese founder-owned crypto exchange Binance and Saudi prince Al Waleed bin Talal.
As always, Musk’s dealings are never straightforward, and he has used every means available to bring the Twitter acquisition over the line. The softly spoken entrepreneur, who is described as both self-deprecating and obnoxious depending on who is being asked, continues to command centre stage as the world watches and waits for his next move. What he will do next is anybody’s guess.