Honestly, I have no idea if Elon's Musk' X experiment is ever going to work out or not.
While many have rightly questioned whether it’s possible for any business to continue operating as normal after culling 80% of its staff, and I’ve been among an array of critics that have taken aim at Musk’s decisions to charge for verification and increase the price of its API access, evidently, his non-conventional approach is working, at least to some degree.
On Monday, amid an exchange about his latest controversial stance, relating to whether or not X should ban the Anti-Defamation League (ADL), Musk made this note:
Our US advertising revenue is still down 60%, primarily due to pressure on advertisers by @ADL (that’s what advertisers tell us), so they almost succeeded in killing X/Twitter!
So X's US ad revenue is still way down from what it had been before Musk took over at the app, and with US ad revenue accounting for some 50% of its overall revenue intake, that would be a pretty grim situation. Right?
Apparently not:
Exactly.
We don't have to get US advertising back to where it was to survive.
But it sure would be nice to see it return.
Of course, we don't know exactly what X's breakdown of current revenue is- it's no longer necessary for a privately owned company to report its public performance.
But if we dig into the numbers that we do know, it's difficult to see how X might have gone the distance towards becoming a company that doesn't actually require US advertising revenue to stay alive.
Back in Q2 2022, X's last performance update prior to Musk assuming the helm at the app, the company indicated that it had taken in $1.18 billion for the preceding quarter, with ad revenue accounting for $1.08 billion of that sum.
So ad revenue was more than 90% of X's intake, and as noted, historically, the US has been its largest ad revenue contributor, at around 50% of all of its ad income. So that translates to US advertisements contributing about $500 million of that number, and with US advertisement spending now having gone down by 60%, as reported by Musk himself, X now earns only $200 million from the US, bringing X's revenues down to $700 million in a quarter, straight away before factoring in any other effects.
But at the same time, X's cost has also plummeted dramatically.
X was cash flow negative by a big margin when its overall outgoings were $1.52 billion in Q2 2022. Staff costs alone contributed $950 million to this, but at a blunt estimate, with Elon cutting 80% of roles, that might reduce staff expenses down to around $190 million in total. Elon has, among other things, removed data centers, renegotiated contracts, and done a bunch of other things to reduce expenses, so the benchmark for viability is now far lower than it once was.
So assuming a few ad expense reductions elsewhere, if I could estimate roughly, Elon's X currently looks on its way to take around $500m-$700m per quarter in advertisement revenue. The total expenses would likely appear to be at a pretty similar level.
The unknown variance here is what X's generating from subscriptions to X Premium and Verification for Organizations, both of which have seen limited take-up, though they could also have seen a boost of late due to X's new ad revenue share program, while some businesses are also now paying a lot more than they used for API access.
So, then it might be the case that X doesn't need US ad dollars like it used to, which gives Musk and Co. more latitude to make content rulings and moderation decisions based on whatever justification they like, if they're not being held to certain standards by ad partners.
Maybe. I don't know, there are a lot of factors which would feed into these estimates, including the fact that the company refuses to pay rent for the offices, fails to fund employee entitlements, etc.
Maybe, without these extra elements factored in, X is in a better position. But either way, its margins, at this point in time, are very, very thin, and it's going to be increasingly hard for X to continue to fund new projects without running the risk of dipping significantly into the red again.
Which it is doing. X is investing in AI, though the actual funding arrangement, and its linkage back to the X platform, is unclear (the project is being funded by "X Holdings"), while it's also increasing its push on video content, which will likely require more server load to maintain operations.
Thus far, X has also been able to unleash a plethora of platform updates that weren't new at all, most of which are tests and experiments that the previous management had put in the shelf. But now, X has pretty well exhausted these projects, which means that it's going to have to move into entirely new territory, which will also require investment into new elements and areas, as it seeks to become Elon's "everything app".
Which is where the real test for the app will be. I’d expect X’s updates to get a lot smaller in scale from here on out, as it looks to innovate with far fewer resources, and with Musk also keeping an eye on the bottom line, it’s going to get increasingly difficult for the platform to make any major moves, without significant financial risk.
Risk appears to be not such an issue for Elon himself. But basically, X's revenue is much lower than it was once, and if it wants to attract more ad dollars, subscriptions, etc., it's going to have to speculate via new elements.
Will that work?
Again, I have no idea, since if you would have told me that Twitter was somehow able to weather a 60% cut in US ad revenue a year ago, I would have narrowed my eyes to the point where tears began burning out the edges. It appears very unlikely that all of these factors could ever come together to the point where X becomes a financially healthy, let alone thriving company. But Elon has beaten the odds before, and maybe, X will be another unlikely success.