Elon Musk’s $44 billion bet on Twitter is bucking the innovation angles of his past big successes

Firing Twitter’s top executives and lugging a sink into its San Francisco headquarters was easy for Elon Musk. Now comes the hard part — making the $44 billion purchase of a struggling social media company pay off.

“Let the good times roll,” tweeted Musk to his 112 million followers on Twitter after the deal closed on Thursday night, taking the company private. Heads started rolling at the company soon after, with the firing of the chief executive, Parag Agrawal, and others. A company meeting was announced for all employees on Wednesday. Soon after, an all-staff meeting was announced and quickly canceled. But that was just the beginning.

Over the weekend, Musk started tweeting out misinformation around the violent assault on Paul Pelosi, House Speaker Nancy Pelosi’s (D-Calif.) husband, racist slurs and memes rose on the platform, and reports emerged that Musk has plans to fire employees and charge anywhere from $4.99 to $20 a month for users to keep their verified status.

In just a few short days of Musk’s ownership of the platform, the world got a taste of the two overwhelming flavors of the billionaire it will likely see going forward — charismatic entrepreneur and chaos agent. But Musk also faces hard math: His purchase saddled the company — which didn’t record its first profit until 2018 — with $13 billion of debt amid a tanking online ad market; the estimated annual interest payments are roughly $1 billion. As Reuters reported last week, Twitter has been bleeding its heaviest users since the covid pandemic began. And at least one major advertiser — General Motors — has suspended advertising on the social media site.

“Musk has described his motivation for wanting to own Twitter as resting primarily on a desire to see Twitter return to a more free-flowing and less self-regulated platform,” said Paul Barrett, deputy director of the Center for Business and Human Rights at New York University’s Stern School of Business. “And that goal, which I’m sure he will pursue in one way or another, we don’t know the details yet, that could lead Twitter back to the future, in the sense that it could return to the more toxic, divisive venue that it was.”

Whether that will make Twitter more profitable is an open question, to put it mildly.

Twitternomics

Founded in 2006, Twitter lost $221 million last year on revenues of $5 billion, with 89 percent of that money coming from advertising. The company has had only two profitable years — 2018 and 2019 — in its 16-year run.

Musk’s drawn-out, litigious, adversarial and sitcom-esque purchase of Twitter, a saga that began in April, has prompted doubt from many tech-industry observers that he can make the company profitable. Even Musk acknowledged he paid too much for the site, something he may be trying to rectify by laying off and refusing to pay out millions to senior staff that he let go.

“Welcome to hell, Elon,” wrote Nilay Patel of the Verge on Friday, noting that Twitter’s business rests on content moderation, weeding out obnoxious, hateful or otherwise objectionable tweets that drive consumers away from the ads that make up most of its revenue.

Frustration with that content moderation seems to have motivated Musk’s purchase of the company. A self-described free-speech absolutist, he has flirted with letting former president Donald Trump back onto the platform. Yet the need to keep advertisers happy may already be weighing on him. On Friday, Musk said that a content moderation panel would convene before the company reinstates anyone already kicked off Twitter, such as Trump, or changes its policies. And in a bid to reassure advertisers, pledged that Twitter will not become a “free-for-all hellscape.”

But he himself is now stress-testing that promise. In addition to Musk’s tweet about Pelosi, Bloomberg has documented a 1,300 percent surge in the N-word on the site since news of the acquisition broke.

More fundamentally, business observers have had trouble seeing how an engineering wizard who specialized in conquering the manufacturing problems of batteries, electric cars and reusable rockets would fare in the world of social media, where the human attention span is the field of play for Twitter and its competitors.

“I think one of the reasons why Twitter has struggled financially all these years is that very reputation,” said Barrett, referencing the toxic environment on the platform of the mid-2010s before the company pursued more stringent moderation practices. “I think, if Twitter had exercised more self-regulation earlier, we might have seen it snapped up by a larger tech company.”

Elon’s Elon

Buying Twitter cuts against the entrepreneurial grain for Musk, who made his $223 billion fortune — and made himself the world’s richest person — with new, small companies that perfected disruptive technologies. Both Tesla and SpaceX, with electric cars and reusable rockets, blew up old and wealthy markets run by established firms like Ford, Toyota and Boeing.

With Twitter, he is instead buying an established company whose groundbreaking technology — the tweet — has failed to disrupt the online advertising business owned by Google and Facebook for the last two decades.

Twitter has always struggled as a commercial venture. Its divisiveness and edginess have created ambivalence among advertisers, Barrett said. To put it another way, advertisers don’t want to see their ads for soap or a children’s toy next to a racist meme. And ads are where Twitter makes the majority of its revenue — 92 percent in 2021.

Meanwhile, Musk’s reported interest in a subscription model for verified users depends not just on those users being willing to pony up cash, but to stay on the site — which may not be the case if content moderation standards become more lax.

“I don’t think people will pay a significant amount of money for access to Twitter.” said Barrett. “I think instituting a subscription model across the board would drastically shrink Twitter’s user base and would almost by definition shrink its ability to charge for advertising.”

Other experts said it was too early to write off Twitter or Musk, given his past successes. “Elon’s Elon, he’s gonna do what he is gonna do, and you really can’t count him out,” said Charles Matthews, a professor of entrepreneurship and strategy at the University of Cincinnati. “Conventional wisdom is he paid too much, but it is really too soon to tell.”

Musk’s modus operandi is selling a new product that overcomes inefficiencies in an existing market, said Matthews. Take SpaceX’s Starlink satellite internet services: The advent of small, mass-produced satellites launched on SpaceX rockets — which are cheaper than competitors’ — has the potential to make this service, which had already been around for years at a higher cost and slower speeds, an affordable global technology. Although Twitter at first glance doesn’t resemble Musk’s other companies, he does like to sell new products in old markets, Matthews added. While Twitter is venerable by internet standards, perhaps there is some opportunity that he is seeing — like the potential for subscription revenue — that other people wedded to our current conception of Twitter can’t.

Musk has even hinted of creating a super app akin to China’s WeChat, called X, that would include Twitter, Starlink and other services.

“Entrepreneurs don’t confine their thinking to the evaluation of the possible outcomes in the same way that ‘ordinary’ people do,” said Peter Phillips, a professor of finance and banking at Australia’s University of Southern Queensland who has studied Musk’s past innovations with his colleague Gabriela Pohl.

Musk might see an opportunity in what are called “Web3″ services, a third stage of the internet built around decentralized nodes connected by the blockchain technology that might be more immune to bots and malware and more amenable to secure payments with cryptocurrencies. (On the other hand, Musk has called Web3 “a marketing buzzword,” which might argue against this.)

“Somewhere, beyond the social media phenomenon that we call Twitter, positioning Twitter as a problem-solving hub is what we think has motivated Musk’s decision,” said Phillips. “If he paid too much, time will tell.”

Thanks to Lillian Barkley for copy editing this article.