Musk’s bird will struggle to stay aloft

Elon Musk officially moved Twitter into his own cage last week. The world’s richest man wasted no time making changes, firing top executives and dissolving the board of directors. More bloodletting is coming. As much as half of Twitter’s 7500-strong workforce could be laid off.

There are plans to charge Twitter users US$8 ($14) a month for a verified account, which looks odd.

Musk will need all the cost savings and revenues he can get. His US$44 billion acquisition of the world’s “digital town square” is one of the largest leveraged buyouts in history. To fund the deal, Musk loaded Twitter — lossmaking for 10 of the past 12 years — with US$12.7b of debt.

Analysts say net interest expense will climb from US$51 million last year to over US$1b a year as a result. Having vastly overpaid to free “the bird”, Musk will face an uphill battle to keep Twitter in the air financially.

For starters, his plan to offer a premium subscription service for US$8 a month risks backfiring. Assume that the number of its own (blue check) verified users followed by Twitter, roughly 424,000, is correct. Even if every verified user will pay the fee to keep their blue check, that will just generate US$41m a year in revenue. Worse, asking users to pay for a previously free verified account could cause them to leave the platform altogether. The verified blue check is meant to protect content creators from imposters and users from scams and misinformation. Allowing anyone to pay for it defeats the purpose.

Some cost-cutting makes sense. Costs and expenses (including litigation) totalled nearly US$5.6b last year. Almost half of this went to sales and marketing and research and development. The latter nearly doubled in the two years to 2021. But a heavy cull of staff in a short period might unnerve advertisers, never mind other employees.

Musk said he did not buy Twitter to make more money but “to try to help humanity, whom I love.” Just as well as it looks more of a flutter than a proper investment.