Good morning, team! We’re working toward the end (?) of the Musk-Twitter saga now that the deal is loosely settled and the social media company’s earnings are out. But the latest round of numerical disclosures from Twitter revealed just how dependent the company is on advertising revenues, which highlights a potential weak spot in the plan by the technology mogul to buy and reform its service.
For the sake of clarity, I am a Twitter user and free-speech advocate. By that, I mean that I think that governments should not control the speech of private citizens. This means that I am in favor of Twitter finding a platform posture that allows the maximum of user speech while maintaining a market position that allows it to also run a business.
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On the ability to run a business, there are two sides to the matter. First, Twitter must create a platform on which users want to spend lots of time. Why? Because time spent using Twitter translates to advertising opportunities, and therefore revenue. Second, Twitter must operate a platform that advertisers are willing to spend money on; it can’t have so much toxic content that advertisers don’t want their brand associated with the muck.
YouTube has faced similar issues, for example.
I share all of that because Musk appears to take the view that Twitter has done too much to control its platform — though it can be a little hard to parse precisely whether the multi-CEO is joking or being serious in his public missives. He seems to believe that users should have more white space in which to scribble. Whether I agree with Musk is immaterial; what does matter is how advertisers view the possible impending changes. Because if they don’t like them, Twitter’s business has few ways to recoup the loss of those incomes.
The company’s earnings results this morning make that plain. And with Twitter already looking to placate advertisers ahead of its sale, it’s not hard to see where Musk’s plans for the social media giant could run into a financial reality that is anything but salubrious.
What’s the risk?
Simply put, if Twitter relaxes its content moderation policies and there is a surge of toxic bullshit, advertisers could walk. Sarah Perez explored this for TechCrunch rather recently:
If Twitter were to turn back the dials on content moderation, it could allow more bullying, violent speech, hate speech, misinformation and other abusive content to gain ground. This may make Twitter less palatable to newcomers who were already wary about posting in a “public square” — an area that impacts Twitter’s ongoing concerns with flat user growth. But it could also disincentivize advertisers from investing their budgets with the platform.
This is not an idle concern ginned up by your friendly TechCrunch crew as we spitball business dynamics on Slack all day. Not one bit. Twitter is working ahead of the sale to assuage advertisers.
Today’s earnings report showcases why Twitter is so hellbent on preserving its advertising incomes: It has little else to lean on. From the company’s Q1 report, detailing how it generated around $1.2 billion in total top-line revenue:
- Advertising revenue totaled $1.11 billion, an increase of 23%, or 26% on a constant currency basis.
- Subscription and other revenue totaled $94 million, a decrease of 31% year over year, or a decrease of 5% year over year when excluding MoPub from the year ago period.
Advertising revenue is up and subscription revenue is down, putting the entire weight of growing Twitter’s total revenue base on the back of ads. If the ads go, so too does Twitter’s revenue base and therefore its profitability. Twitter had positive operating cash flow in Q1 2022 of a little more than $126 million. That’s not a huge margin to lose dollars against, meaning that even a moderate advertising defection could push Twitter to the break-even cash flow basis quickly; any larger retreat from advertising customers and Twitter could start to bleed cash.
Not that it doesn’t have more than $5 billion in cash and equivalents, but Twitter is anything but a steady ship if you loosen the ropes holding its advertising sails in place.
It’s hard to be a two-act company
A company getting big on the back of its leading business is no sin. Alphabet is still effectively a display ads business, with some other stuff glued on. Coinbase is a trading business, despite its efforts to diversify its incomes over time. And Twitter, despite its Blue subscription service and data sales, is an ads business. It’s just hard to have a second act that adds up to your core business as a company of scale.
Twitter is not unique in its single-plank business. But Musk publicly discussing making the platform more freewheeling — and therefore, potentially, more abusive and toxic — puts at risk users and advertisers, i.e., both sides of its current revenue equation.
This will set up a natural experiment of sorts, as Musk will own the company provided the deal goes through, making him the sole arbiter of what is reasonable. We won’t get the financial blow-by-blow, but we will be able to see how post-sale Twitter talks about its platform to both users and advertisers. That should create enough signals for us to approximate how things go.
Buying Twitter is not cheap for Musk, who is borrowing heavily against his Tesla holdings to execute the deal. It feels odd, doesn’t it, that the tech exec is leveraging his past wins for a crack at making Twitter a potentially less obvious place for advertisers to place bets?