Christian Zelaya / Forbes
Ah, free speech online—an ability to say whatever, whenever. Things like, The sky’s pink! Or to insist that President Biden is a space alien. The coronavirus? George Soros started it—in a cave, in Irkutsk. Soros!
Letting people have their unfettered say may seem good—until you set out to run a multibillion-dollar business with 7,500 employees, deep-pocketed competitors, mounting debt obligations and a revenue model built entirely around ads from mainstream brands. The latter represents a set of stakeholders who tend to get antsy about paying millions of dollars to place their images and videos next to posts positing that Biden really is a space alien from a pink-sky planet. Which seems to be something along the lines of what Elon Musk is suggesting should happen at Twitter once his $44 billion takeover closes later this year.
Musk hasn’t had much to say about how he’ll run Twitter. But on the point of free speech, he’s been the clearest: Twitter should allow more speech, echoing a familiar line of Republican complaints about Twitter, criticism made vociferous after Twitter barred President Trump after the Jan. 6 riots. “I hope that even my worst critics remain on Twitter, because that’s what free speech means,” Musk tweeted on Monday. In an earlier tweet, he characterized himself as a “free speech absolutist.” He tried to clarify a bit later on: “By ‘free speech’, I simply mean that which matches the law.”
With an almost-anything-goes mentality, “There’s the potential for brand safety issues to arise and for brands to rethink if it’s a platform that they want to invest in and be aligned with,” says Brendan Gahan, partner and chief social officer at the San Francisco advertising agency Mekanism. He speaks not from some frilly liberal bubble. Mekanism’s clients have included brands like Quaker oatmeal, Alaska Airlines and Georgia-Pacific (a Koch subsidiary). “I’d certainly imagine that ourselves and the brands we work with would revisit whether or not it’s a place we want to be aligned with.”
Actually, it’s rather hard to find someone on Madison Avenue who thinks Musk’s plan sounds sensible. Sarah Hofstetter, the former chairwoman and CEO of New York-based agency 360i, offers a concurrence. “If you’re a brand, you want an environment that is safe enough for your brand to be able to feel comfortable speaking,” says Hofstetter. Though she left 360i in 2018, she’s still thinking about this sort of thing from a seat on Campbell Soup’s board. “There’s always a conversation about navigating what is right for the safety of a brand before it agrees to play on a platform. It’s something that’s been going on, gosh, for the better part of a decade, right?”
It is, but Musk seems intent to roll back Twitter to an even earlier era, poised to drop or limit the content-moderating practices the company has increasingly added over the last few years. He’s floated some real doozies since first disclosing his Twitter shareholder status on April 4—like, turn Twitter HQ into a homeless shelter—but the one purposing greater free speech is the most perilous proposal, advertising executives say. It’ll scare the stuffings out of Twitter’s advertisers, and ads are essential to Twitter, accounting for the entirety of its $5.1 billion in revenue, jeopardizing it.
Mark Weinstein understands this situation well. He’s the founder of MeWe, a small social media app favored by conservatives that takes a (to put it politely) light-handed approach to content moderation. “Absolute free speech doesn’t work to grow a platform,” he says. A thriving ads business and unrestricted free speech? They simply cannot go together if a company want to keep the lights on. MeWe did $7 million in annual revenue last year not through ads but through monthly and annual subscriptions. “When a site is full of trolls and people espousing hate and violence and prejudice, it’s just not tolerable for good people.” And whether you think marketers fall into that category or not, it would certainly apply to the audience they hope to reach through Twitter ads.
Musk doesn’t have a lot of wiggle room unless he wants to let Twitter operate at a loss, funding it from his considerable personal fortune ($239.2 billion at last, best estimate). Twitter already struggles to monetize its users as successfully as Meta, bringing in around $25 in annual revenue per user compared to Meta’s $41. Because Twitter collects only limited user data (age, name, phone number), its ads are seen as less valuable than Meta’s, which serve up a smorgasbord of data on our lives and interests to advertisers. There are some industry-wide challenges, too, including changes to Apple’s iOS software that have allowed users to stop apps from tracking them—making mobile ads less valuable—as well as inflation and recession fears weighing on ad budgets.
But what could make Twitter’s financial situation truly untenable is the debt, the $12.5 billion in loans taken by Musk to fund his acquisition that Twitter Inc. will need to pay for. (Adding debt to an acquired company’s balance sheet is a standard buyout tactic.) With the loans’ rates around 4% to 5%, Twitter will need to pay between $1.15 billion to $1.3 billion a year just in interest. Last year, it didn’t manage to make more than $167 million in earnings before interest and taxes.
Okay, to recap: If Musk did nothing to change Twitter, he’d still need to substantially raise profitability to afford the company’s increased debt. But if he makes significant changes to Twitter’s revenue model by allowing more questionable speech there, driving away ad dollars, he will need to replace that lost revenue somehow while also growing profit to accommodate the debt. This doesn’t account for a mind-numbing third scenario where Musk would (1) promote free speech, lowering ad revenue, (2) replace the lost revenue and grow sales in a way that doesn’t involve ads and (3) increase profitability to pay for the debt. In any of these scenarios, his best tools for accomplishing the profitability increase are cost-cutting (layoffs, to start) and developing some higher-margin product.
If Musk doesn’t want ads, the obvious media-business ploy is a subscription product. Last year, Twitter started to experiment with one called Twitter Blue, which costs $2.99 a month. But it offers only limited features, like seeing the most shared links among the people you follow and an Undo button, a timed-editing function. Twitter hasn’t disclosed how many Twitter Blue subscribers there are, but it certainly hasn’t added a “subscriptions” item to its income statement. (You would expect a company to do that around a fast-growing business line; Meta did recently with its metaverse unit.) To give Musk some credit, he is the person behind the world’s most popular electric cars and some of the only operable spacecraft on Earth. So if anyone can dream up new services people will actually pay for, he’s as good as anyone to give it a try.
Yet even Musk won’t be able to change the reality that even the best subscription-based businesses generally can’t convert more than 7% to 8% of users into paying subscribers, according to conversations with investors and executives active in the space. Let’s say Musk just wanted to replace half of Twitter’s annual revenue—call it $2.5 billion—by selling a monthly $9.99 subscription. (That’s what Discord, a social messaging company, charges for its successful Nitro program.) Musk would need about 21.5 million subscribers out of roughly 265 million total users. Twitter last reported that it had 217 million users, not even enough to plausibly cover replacing half the ads revenue. To get just halfway, Musk would need to boost Twitter’s user base by 22%—even as he makes fundamental changes to the platform that will likely lose him at least some users.
Let’s end with a sobering story from someone who has spent even more time thinking about how Twitter should monetize than Musk: Anamitra Banerji. Banerji is today a managing partner and founder of Afore Capital, a San Francisco-based VC firm. In another life, Banerji was Employee No. 25 at Twitter, its first product manager and the first guy tasked with thinking about its monetization strategy. He joined around early 2009, just after Jack Dorsey had left (for the first time) and cofounder Ev Williams had taken over the CEO role.
“Twitter at that point is already a cultural thing,” he recalls, “but it doesn’t make any money.” He brainstormed several revenue streams, perhaps charging users to add a verification mark on their profile (Musk has suggested something similar) or charging for a back-end dashboard. Maybe something higher touch: Disney approached Twitter and asked if it could take over the Twitter logo for a day to promote its 2010 Alice in Wonderland remake, swapping out the final Ts in T-w-i-t-t-e-r for the characters Tweedle Dum and Tweedle Dee. But the Disney idea and even the one for bundling together add-ons like verification and dashboards had the same root problem. “How can you scale something like that? How successful will you be?” he says. When Banerji sat down and thought about it, he figured that maybe no more than 1% of Twitter users might pay for a subscription.
To solve the problem of Twitter’s missing revenue, Banerji returned again and again to the same answer. “Advertising,” he says. He left in 2011, just as Twitter started to fall behind Meta (then TikTok) in the race for photo- and video-based advertising, which are more lucrative. “But I still think it’s the best way to monetize Twitter—bar none.”
Christian Zelaya / Forbes