Chaos at Twitter brings up doubts about path forward

Elon Musk’s Twitter is engulfed in chaos amid widespread layoffs and an exodus of major advertisers. 

Just one week in as Twitter’s owner, Musk reported a “massive drop in revenue” due to companies pausing their advertising on the platform. Twitter is also struggling to roll out a new paid verification feature that has drawn ridicule from popular users.   

Musk tweeted that he had “no choice” but to lay off around half of Twitter’s staff because it was losing $4 million per day, which translates to nearly $1.5 billion annually. 

Users, meanwhile, have been left with a lot of questions and few answers about what this means for them and what Twitter will look like when Musk’s transformation of the platform is complete. 

The company’s struggles are also raising the question of whether Musk can turn Twitter’s fortunes around and make enough money to pay off his newfound debts. 

Twitter wasn’t profitable before Musk agreed to pay $44 billion to buy the platform by taking on nearly $13 billion in debt. Those loans will saddle Twitter with around $1.2 billion in interest payments over the next 12 months, and the company only generated around $630 million in cash flow last year. 

“The debt situation is definitely concerning as this was a fairly unorthodox investment to have taken on so much debt given the cash flow situation of the business even prior to the acquisition,” Harvard Business School professor Andy Wu said.

The banks that helped finance the Twitter deal, which include Morgan Stanley and Bank of America, have reportedly conceded that they will have to hold the debt for now and are expecting to take a huge loss on their investment. 

Experts say that Musk should focus on shoring up Twitter’s relationship with advertisers, which make up around 90 percent of the platform’s revenue but have pulled back their spending amid concern about Twitter’s direction. 

The Associated Press reported that General Mills, Audi and General Motors are among the companies that have already paused their Twitter ads. 

Wedbush analyst Dan Ives said Musk is walking a “tightrope” as he tries to appease advertisers while “going down the freedom of speech route.” 

“It’s a Pandora’s box with Musk. The last thing advertisers are going to do is bet on Twitter. You don’t know what’s going to happen in the next hour, let alone the next month,” Ives said. 

Throughout the six-month saga of Musk’s acquisition of Twitter, he pushed a vision for creating a “free speech” platform, indicating he would roll back some content moderation measures put in place such as removing permanent bans on users for violating policies including posting misinformation. 

Advocacy groups warned those changes could lead to a rise in hate speech and misinformation on the platform. A coalition of dozens of advocacy groups last week urged advertisers to pause all ads on Twitter after mass layoffs at the company, a change the groups said meant Twitter could not moderate content at an acceptable rate. 

IPG Mediabrands, which represents brands including Coca-Cola, Johnson & Johnson and American Express, sent a recommendation to its clients last week urging them to pause ads, the AP reported. 

At the same time, Twitter is grappling with the same changes the rest of the social media world is facing due to changes to the advertising industry, largely based on Apple’s iOS update that requires apps to ask users if they want their data tracked across apps. 

But Musk’s other plans to generate revenue, including through building up Twitter’s paid subscription feature, may not be a viable path forward either. 

Musk teased plans to start charging users $8 a month in order to receive a blue checkmark showing they are verified users, an option Twitter has historically offered for free for certain public figures. 

Some prominent users pushed back on the plan, and experts have raised concerns about it undermining credibility on Twitter by making it harder to confirm if verified accounts are legitimate or not. Musk said Sunday that Twitter would ban users who use the blue check to impersonate others. 

Users also may be hesitant to pay for features once offered for free. A Harris Poll survey published last week found more than 60 percent of Twitter users surveyed said they would ditch Twitter if a monthly subscription were required. 

Ives compared it to “charging for bread in a restaurant.” 

“Once people are used to getting things for free, they’re going to fight tooth and nail,” he said. 

Business experts say that Twitter needed to diversify its revenue streams to be less reliant on advertising. The challenge is developing and carrying out new business models after Musk laid off 3,700 workers, including Twitter’s entire leadership team. 

“Performing those changes requires a fairly sophisticated and complex workforce, and when half of your workers are looking for jobs at this point, those kinds of changes become much more difficult to implement,” said Dan Wang, a professor at Columbia Business School. 

Twitter also faces a potentially pricey class-action lawsuit from laid-off employees who allege Musk didn’t provide the 60-day warning required by California law. 

The layoffs are part of an aggressive cost-cutting strategy that will leave Twitter with a barebones team to handle its 200 million daily users. Musk reportedly wants to find another $1 billion in annual savings by cutting Twitter’s cloud and server costs, prompting fears that the platform won’t be able to handle spikes in traffic. 

While the outlook for Twitter looks grim, experts note that the platform was having trouble monetizing its product before Musk arrived. Twitter reported losses of $221 million last year after losing a whopping $1.1 billion in 2020. 

“Twitter is a business that’s been struggling for a long time. If they do nothing, then Twitter is almost certainly going to fail. At least doing crazy stuff increases some fraction probability that this will succeed,” Harvard’s Wu said.