Elon Musk’s support may mean Twitter needs ads to stay in the air

Wall Street has long known that it is better to play with other people’s money. But in Elon Musk’s case, other people’s money may limit how much he can play with Twitter.

TWTR 3.57%

The campaign of the world’s richest person on paper to take over the social network has gained momentum. The Wall Street Journal reported Monday morning that the two sides were talking and may even finalize a deal on Monday. It comes after Mr Musk revealed in a filing late last week that he had secured $46.5 billion in financial backing for his bid. That was apparently enough for Twitter’s board to take a second look after initially leaning against the offer. Twitter’s share price rose nearly 4% in early trading Monday.

It remains unclear what would ultimately happen to Twitter if Mr. Musk prevailed. A successful bid would put a $5 billion a year advertising business in the hands of someone who has publicly questioned Twitter’s advertising business model and whose current company – Tesla – does not buy any advertising.

The self-proclaimed “free speech absolutist” also spoke out against Twitter’s content moderation practices, which are designed to keep toxic content away from the social network and make it safer for advertisers. Brian Wieser, global president of business intelligence at ad-buying giant GroupM, says most advertisers who work with Twitter “strongly prefer content standards” over the service.

That may not matter much to Mr Musk, who said of his own Twitter campaign that it was “not a way to make money” in an onstage interview at the Ted talk, the same day of the filing outlining his financial support. . But more than half of that support comes in the form of debt, from Morgan Stanley and “certain other financial institutions,” according to the filing. That means Mr. Musk will have to preserve Twitter’s cash flow — and ideally grow it — to pay off the debt. Some of that debt comes in the form of margin loans backed by Mr. Musk’s Tesla stock.

To do this without advertising would be difficult. Ads now make up nearly 90% of Twitter’s revenue, while data licensing provides most of the rest. The company launched Twitter Blue, its first consumer subscription offering, last year and rolled it out to the US market in November. Chief executive Parag Agrawal said on Twitter’s latest earnings call in February that the company had seen a “strong response” from “our most intensive users” for the service. But he added that Blue was “not critical” to hitting $7.5 billion in revenue in 2023, a target set at an analyst meeting in early 2021.

Mr. Musk will likely have his own goals in mind, and a private Twitter would be accountable only to him for achieving them. But unless Mr. Musk finds a way to pay Twitter entirely out of pocket, he will also have to be accountable to others.

As Elon Musk tries to buy Twitter, WSJ looks back at former Twitter contenders, like Salesforce, Disney and Alphabet. Tech journalist Tim Higgins explains why those past conversations fell through and what’s different this time. Illustration: Nikki Walker

Write to Dan Gallagher at [email protected]

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