Foreign. It has now been almost nine months since Elon Musk Walked into Twitter's San Francisco headquarters holding a kitchen sink. This was for Twitter's 8 000 employees to let it sink in that Musk now owns the company and plans to make major changes. While Musk's primary motivation was his Free Speech advocacy, the 44 billion dollar acquisition was nevertheless a financial Endeavor with the expectation of profits of the 44 billion dollar purchase price.

only 60 came from Musk's own pocket. 13 billion dollars came from a loan with a 12 interest rate. The remaining seven billion dollars came from co-investors including but not limited to billionaire Oracle Founder: Larry Ellison Saudi Prince Al-walid Bin Talal The Venture Capital Fund Sequoia Capital in Andres in Horowitz and the mutual fund giant Fidelity Musk, convince these investors to buy in by claiming that he would massively expand the scope of Twitter's business model. instead of just being a social media platform, Musk would turn it into a super app which would support mobile payments and other Financial Services Similar to the WeChat app in China On July 23, 2023, Elon Musk officially announced that Twitter was changing its logo from the previous Bluebird to a black X Linda Yaccarino, who Musk recently appointed to be Twitter's CEO said the new X branding is meant to portray the company's broader Ambitions to become an audio, video, messaging, payments and banking platform.

This transformation couldn't come soon enough. Twitter's Core Business is floundering with the companies still losing money despite laying off 80 of their employees in this video. We'll take a look at why Musk rebranded Twitter to X Is this the beginning of his next trillion dollar idea? or is this just a marketing gimmick meant to distract attention from the disastrous performance of the core advertising business. Thank you! Twitter's final full year as a publicly traded company was 2021.

The company made 5.1 billion dollars of Revenue, substantially all of which came from advertising. They also posted a 500 million operating loss, but this included an 800 million litigation from a previous shareholder lawsuit. Had it not been for the lawsuit, they would have barely broken. Even when Musk acquired the company for 44 billion dollars, he was already starting with a massive handicap.

He loaded the company with 13 billion dollars of debt, which carries an annual interest expense of 1.5 billion dollars. Twitter has never made an operating profit of 1.5 billion dollars in its history, so Musk needed to massively increase profitability just to make the interest payments. But the more pressing issue was Musk's views on content moderation. Musk believed Twitter was too aggressive in censoring controversial content.

He wanted to take a more libertarian view and allow more types of speech to Go uncensored. Many Brands were scared that their ads could be shown next to profane or controversial tweets, so hundreds of advertisers paused spending on the platform less than a month after closing the transaction. Musk claimed the company was losing 4 million dollars per day due to the elevated interest expense as well as a steep decline in advertising Revenue due to the company's rapidly deteriorating Financial condition, Musk had no choice but to enact multiple rounds of draconian layoffs, ultimately firing 80 percent of Staff. With Twitter no longer being a publicly traded company, they are no longer required to publish their financial statements, but we can get a pretty good idea of what's Happening under the hood based on Musk's periodic public statements.

In April of 2023, Musk sat down for an interview with the BBC where he gave a relatively detailed account of the company's financial performance. These are rough numbers: a revenue dropped from four and a half billion to three um, uh, and um expenses went from four and a half to six, creating a three billion dollar negative cash flow situation and Twitter having a billion dollars in the bank. That's four months to live. So unless drastic action was taken immediately, this company is going to die.

As a result of the advertisers pulling back, Twitter's Revenue immediately decreased by 33 from an annual run rate of 4.5 billion dollars to 3 billion dollars. At the same time, their annual cost increased from 4.5 billion dollars to 6 billion dollars. It's important to note that the increase in cost was entirely attributable to the 1.5 billion dollars of interest expense. The actual operating expense didn't increase at all, but either way, Twitter was on track to lose 3 billion dollars per year.

Given the losses, he had no choice but to reduce costs substantially by laying off staff. But according to Musk, things were improving. The layoffs reduced the company's cash burn, buying the much needed time, and over the following months advertisers started coming back to the platform. In times of advertising, obviously the threats is not a private company anymore, so we don't really know how it's how it's still going.

Have all the advertisers come back uh, not all, but most and you can see it for yourself on Twitter even in the before you feed right? I mean in the sorry In the following: don't use for you because it sucks rightly? um, um, that's not what I said Okay, well why don't you use for you? What's wrong with it? Um, how is it going? is is twittering profit now? no Twitter is uh uh, rough I'd say we're roughly break even at this point and I think you've said before you you see a you see a world where you could be in profit. Is there a timeline on that? Do you think I mean depending on how things go, if current trends continue I Think we could be profitable or I mean if you're more precise we could be cash flow positive. Uh, this quarter. if things keep going well, this quarter, as soon as that, I possibly Yeah.

Wow. Um, and do you have a message for the advertising? I mean can you say which advertisers haven't come back? Um I think I Think almost all of them have either come back or said they're going to come back. There are very few exceptions. Based on Musk's comments, it sounds like things were recovering quickly.

Almost all the advertisers who had left had either already come back or said that they would come back. In fact, so many advertisers had come back that he couldn't even think of a single Advertiser that wasn't planning to come back. and with the strong Rebound in Revenue Twitter was on track to reach cash flow break even by the end of the second quarter. Fast forward to July 15th: Three months after the BBC interview and after the end of the second quarter, Musk put out a tweet saying advertising Revenue has declined by 50 and Twitter's cash flows are still negative.

Thus, the revenue situation has gotten even worse. Not better. The revenue decline has been so massive that Twitter is still losing money despite laying off 80 of their staff. So how is this possible? How can it be that almost all the advertisers are coming back? yet? Twitter's revenue is still decreasing.

Many of the advertisers have returned to Twitter and many never left at all, but each Advertiser is spending far less than they did in the past according to advertising. Executives Interviewed by the New York Times They are confused by the constant changes that Musk is making on the platform, receiving inferior customer support since the layoffs, and are concerned about the lack of content moderation. in any large company. They're almost always unnecessary layers of bureaucracy, and you could probably lay off 10 to 15 percent of Staff without having a material impact on Revenue.

But when you lay off 80 of your staff, you lose key Revenue generating employees such as the sales people who manage the accounts of large advertisers. With so many of these people now gone, the company is finding it difficult to convince advertisers to increase spending. The only reason that Twitter was able to convince the advertisers to stay on the platform at all is because they rolled out so-called adjacency controls. This new tool allows advertisers to prevent their ads from showing up next to unsuitable content.

For example, if you're Disney advertising a kids movie, you might want to avoid posts that contain profanity. Ironically, many advertisers now use the adjacency tool to avoid advertising next to Musk's own tweets. Given their often controversial nature, this has effectively segregated Twitter's ad inventory into two sections: the controversial segment and the uncontroversial segment. Brand conscious advertisers are only willing to use the uncontroversial segment, while less scrupulous advertisers can use the controversial segment.

YouTube operates a similar system. Some videos which are deemed too controversial are put on limited monetization. Advertisers who don't care about their brand image can save some money by buying ads on limited monetization videos. As it turns out, there are very few brands that don't care about their Public Image so there's almost no demand for The Limited monetization videos on YouTube The rates that YouTube charges to advertisers unlimited monetization videos is around 1 10 of what they charge for regular videos.

Thankfully for YouTube, the vast majority of videos on the platform are not controversial and are thus suitable for Blue Chip Advertisers on the other hand, Twitter's content mix is far less favorable. Think about it from the perspective of an Advertiser the most valuable types of accounts to advertise next to are people like fashion influencers. They're uncontroversial and their audiences will be interested in buying fashion and makeup products. Another valuable category is Esports as they too are generally uncontroversial and the viewers are open to buying video games and other related products.

The categories you want to avoid are accounts about cryptocurrencies. Because there are so many crypto scams. Advertisers don't want to be anywhere near this as they fear that it will damage their brand image for a similar reason they don't like not safe for work content. According to an investigation by Reuters, the proportion of cryptocurrency and not safe for work-related posts have been increasing substantially over the past few years, even before Musk took over.

Internal estimates found that 13 of all engagement on Twitter was related to not safer work content. at the same time, Twitter users have been showing declining interest in fashion celebrities and Esports it is believed that these users are leaving in favor of Instagram and Switch. So, even while Twitter's user numbers have been increasing in recent years, the mix of content types has changed unfavorably. While we don't have recent data, the fact that advertisers have pulled 50 of their budget since Musk took over indicates that the situation has probably gotten even worse.

Musk appears to have made a big miscalculation. He may have assumed that the content moderation revolved around hate speech and what he viewed as politically motivated censorship. While this certainly did happen, the majority of the content moderation efforts were around cryptoscams, nudity, and the like. By laying off 80 of the staff, Musk got rid of the political censorship that he detests, but he also got rid of a lot of the legitimate content moderation.

Foreign Musk has tried a few different initiatives to turn around Twitter's rapidly deteriorating Revenue situation. The first attempt was to launch a service where you can pay eight dollars per month to get a blue check mark next to your name and receive some other minor benefits. Prior to Musk, the purpose of the blue check mark verification is to prevent impersonation. For example, if you're a celebrity or a public figure Twitter would contact you and ask for proof of identification.

If the identity verification is successful, you'll get a blue check mark. Musk change the system so you don't have to be a celebrity anymore. All you have to do is pay eight dollars per month on every single metric. The paid blue check mark has been a complete disaster.

Firstly, very few people signed up. In the first three months. Only a tiny fraction of one percent of Twitter users signed up and they generated 11 million dollars. For a company that used to have five billion dollars of annual revenue, this amounts to little more than a rounding error.

More concerning is the fact that Twitter no longer actually verifies the identities of the users who pay for blue check marks. This has led to a huge number of frauds. For example, last year a fraudster created a fake Twitter account purported to represent the pharmaceutical company. Eli Lilly They put out a tweet falsely claiming that they would start giving away insulin for free.

This caused the stock price to tank, losing 15 billion dollars of market capitalization the following day. There have also been numerous complaints of fraudsters using paid verification to pretend to be customer service representatives of Banks and scam People's Bank account information in an effort to offset their declining. Revenue Twitter has also decreased their standards of who is allowed to advertise on the platform. For example, they recently started allowing advertisements for cannabis products in states where it is legal as well as online gambling.

These were two areas that old Twitter refused to touch. The problem with reducing your standards is that it makes respectable advertisers even more reluctant to advertise as they don't want to be associated with their shadier peers. If you watched our previous video about Myspace, they fell into almost the exact same trap in an effort to maximize short-term Revenue They scraped the bottom of the barrel of advertisers. This created a perception of Myspace as a scammy platform, which scared off respectable advertisers and ultimately their user base.

If Musk isn't careful, he might create this same perception of Twitter. With their revenue initiatives failing. Twitter is continuing to burn cash and with Musk already having laid off 80 percent of its Workforce, they can't lay off any more people. Otherwise, they won't even be able to keep the platform operational.

So Musk needed other ways to cut costs. Twitter spends tens of millions of dollars per year renting Office Buildings After taking over, Musk simply refused to pay the rent. The company is currently being sued by landlords in San Francisco New York and London According to a former employee, Musk's lawyer said that it was unreasonable for Twitter to pay the office rent given the fact that San Francisco is a crap hole. He uses slightly more colorful word with Twitter now having only one employee for every five they had pre-musk each worker is expected to work far longer hours.

Before the acquisition even closed, Musk tweeted that he will Implement extreme work ethic expectations, but he assured employees that will be much less than any demands from himself. Musk allegedly asked Twitter's head of facilities management to convert part of their San Francisco office into a hotel. This would allow Twitter's few remaining employees to work through the night. The facilities manager explained that this would violate labor laws and building codes not to mention that they weren't even paying rent on the building anymore.

Most proceeded to fire her. And finally, Twitter is currently in a legal dispute with Google, which claims that Twitter has failed to pay for cloud services that have already been provided. Some of these allegations come from former employees who may be disgruntled, but taken together with Musk's own public statements, it appears that Twitter is taking increasingly Desperate Measures to stay afloat as their revenue collapses. We can also see this reflected in the company's valuation.

While Twitter is no longer a publicly traded company, The Co-investors Who purchase a stake in Twitter are required to periodically review the financial performance of the company and adjust their valuations accordingly. One of these investors was a mutual fund giant Fidelity They recently marked down their stake in the social media platform by two-thirds from 44 billion dollars down to 15 billion dollars. Twitter's Believe your shareholders are now pinning their hopes on the recent x-ray branding and mostly Ambitions to turn Twitter into a so-called super app. Foreign Musk already created X.com more than 20 years ago.

Before Tesla or SpaceX, X.com was a completely online bank with no physical branches, Musk envisioned it to become a full-service online bank, allowing users to send and receive payments, offer checking and savings accounts, buy insurance, and trade stocks. Musk eventually merged X.com with PayPal and left the company. PayPal used X.com's technology to build out its online payments business, but they never pursued Musk's more ambitious plans to create a full-service online bank. With his acquisition of Twitter, Musk has a chance to accomplish what he started 25 years ago with X.com Shortly after the name change, Linda Yaccarino, who most recently hired as Twitter CEO explained the rationale.

She said that X is the future state of unlimited interactivity centered around audio, video, messaging, payments, and banking. Twitter already does audio video and messaging, so it looks like the only thing that will be be added is payments and banking. Musk's idea is for Twitter to become a ubiquitous super app similar to WeChat in China which consumers use both as a social media app and as a way to pay for things at stores by scanning a QR code. In my opinion, it is extremely unlikely that something similar to WeChat would be successful in the US and it is even less likely that Twitter would be the one to make it.

The reason that we can't pay was so successful in China is because when it was launched in 2013, the country's banking system was still in its infancy and most consumers still paid for goods using paper cash, loading money onto your WeChat pay account and paying with a QR code offers a superior experience for the consumer and the merchant, as both can avoid the dangers of carrying around large amounts of cash. Because of its superiority over cash, WeChat Pay quickly became the ubiquitous payment method within China. The situation in the U.S is very different. By the time smartphones became widely adopted in the early 2010s, most people were already using debit or credit cards.

While a mobile payment system like WeChat is substantially Superior to cash, it is only marginally more convenient than credit and debit cards, so consumers and Merchants have far less incentive to adopt this new technology. We know this because Google and Apple have been operating WeChat like Mobile payment solutions for many years. Mobile wallets like Google Wallet and Apple Pay currently represent about 12 percent of all in-store transactions in the US. That's compared to 71 percent of payments which are made on traditional credit and debit cards.

If Musk tries to create a competitor to Google Wallet and Apple Pay, there's no reason to believe it will be successful. In fact, there is significant reason to believe that will be. a failure To create a new payments product from scratch requires a large number of talented software Engineers as well as people familiar with financial regulations. With Twitter having laid off 80 of their staff, the few remaining employees are stretched thin just trying to keep the lights on.

They have no capacity to build an ambitious new Financial Services offering. Also, the recently hired CEO of Twitter Linda Yakarino previously worked for NBC Universal as their head of advertising sales. She has no experience in the financial services or payments. Industries The only conceivable way for this new venture to work is for most to sell tens of billions of dollars worth of his Tesla shares and pump all this money into Twitter to give them the resources to build what he's envisioning.

He technically could do this if he wanted to, but remember that he borrowed 13 billion dollars to help fund the acquisition in the first place. He did this to minimize the number of Tesla shares he had. Well, given Musk's reluctance to sell his Tesla shares, it's unlikely that he'd be willing to pump enough money into Twitter to make the X.com transformation of success. I would love to be proven wrong, but as of right now, most acquisition of Twitter looks like it might be one of the greatest disasters in business history.

All right guys, that wraps it up for this video. What do you think about Twitter If you were in charge of the company, what would you do to turn it around? Let us know in the comments section below. As always, thank you so much for watching and we'll see you in the next one! Wall Street Millennial Signing out.