I can’t imagine what Elon Musk was thinking (in the narrow window earlier this year) when he decided he wanted to buy Twitter. Turning the company around isn’t going to be fun.
Here is a selection of Twitter’s problems.
1) It can’t grow its way out of trouble
Confronted with a problem, the standard technology industry tactic is to grow out of it. With sufficient growth in users, all kinds of knotty issues get resolved. It works for software companies like Facebook and for hardware companies like Tesla. But it’s not an avenue that’s open to Twitter.
Of the 7.5 billion people who don’t use Twitter every day, it’s fair to say most of them are aware of it and have decided not to bother.
Unlike Instagram, Facebook, Snapchat, WhatsApp, TikTok or LinkedIn, Twitter is inherently a niche product.
It is, essentially, a dense stream of text from people you don’t know. The stream of text is very boring at first, before you have cultivated a good feed. Cultivating a good feed takes months or years.
For a certain type of person, this arrangement is great. But it’s never going to be mainstream. This is reflected in its user numbers.
In Twitter’s early days when it was growing like crazy, it told investors how many monthly users it had. Growth in monthly users flattened out in 2015 or so. And in 2019 it stopped sharing the monthly user number figure altogether.
After 2019 Twitter focused on a narrower metric, monetisable daily active users. It has 238 million of them. The new metric was an admission that Twitter was never going to be a world-dominating social network like Facebook or LinkedIn. It was, and still is, a niche product for information addicts.
2) It can't build an advertising business on its existing users
Okay, so Twitter isn't Facebook. But 238 million daily addicts isn't bad, right?
238 million addicts turns out to be insufficient for the type of business Twitter has been trying to build.
Twitter has been trying to build an advertising business, again, like Facebook's. Facebook is a great business because a) it knows a lot about its users and b) it has invested in great tools for advertisers. Facebook customers — companies seeking to place ads — can run a profitable Facebook ad campaign quickly and easily, with no human help.
Twitter by contrast doesn't know much about its users, at least in a demographic sense. It knows what they're interested in. But that turns out to be less valuable than all the data Facebook scrapes on its users.
Twitter's size is another problem. Digital ad campaigns work better when they're bigger. Small campaigns are difficult to calibrate properly. Advertisers don't want to be fiddling around, allocating small amounts of money to multiple ad platforms. They want to put it all into the one that works best.
The nature of Twitter – a wall of mostly text – is another problem for an advertising business. Instagram and Facebook by contrast are more visual. Pictures and short videos are a more natural fit for ads.
To be sure, Twitter has grown advertising revenue a lot in recent years. In 2021 it made $4.5 billion. But it's coming from a low base.
Facebook by comparison made $32 billion from advertising in 2021. Twitter made $60 per daily active user in North America; Facebook made $61 per monthly active user in North America. So Facebook makes as much money from users who are only moderately engaged with its products as Twitter makes from its most hardcore addicts.
3) Twitter's product is a bad fit for a subscription model
Twitter is too small, and it knows too little about users, to make much money from ads. What about a subscription model?
The problem with a subscription model is that it's not a great fit for a social network. It would instantly reduce the number of Twitter users. By how much? Many people love Twitter, but it's a guilty pleasure. A paywall might nudge even me, a fan, into quitting the platform and doing something more productive with my time.
Twitter is valuable because other people are on it. If the number of users goes down, it decreases the size of the network and decreases its quality. Fewer users would make Twitter worse which might make more people leave it which might make more people leave it.
An advertising business model really is a perfect fit for social networks. It's a shame Twitter hasn't been able to make it work.
4) The users have power
Twitter is like a group chat room for the planet. That's quite hard to replicate. It gives Musk a bit of leverage — where else will users go?
But the users have leverage, too. Annoy them enough, and they could migrate en masse somewhere else. Already, there's a spike in users setting up accounts on Mastodon, a rival social network.
It has happened before — the users of the popular social sharing site Digg all jumped ship to Reddit in the space of a couple of weeks, in response to unpopular changes to the site. That was the end of Digg. Years later, Reddit's new owner tried to make some changes in an effort to make more money from the site. Reddit's users kicked up a fuss, and the owners were forced to back down.
5) The interest payments are coming due
For all its problems up to now, Twitter has had the benefit of piles of equity funding.
This has been a nice arrangement for Twitter management. Even though the company has been unprofitable for years, there's been no massive pressure to change things.
But now Musk is in charge and, even scarier, he brought bankers with him. Twitter now owes Morgan Stanley, Bank of America, Barclays, MUFG, BNP Paribas Mizuho and SocGen a total of $13 billion. According to the New York Times, the interest bill will come to about $1 billion.
Hard-nosed private equity people are known to say that debt is good because it disciplines a company. Interest payments must be met. They have a way of forcing difficult decisions that otherwise would not be made.
For Twitter, $1 billion is a lot of money. Its current interest bill is $50 million. The following chart shows free cash flow — that is, operating cash flow minus capital expenditure — going back to 2010. The company has never made more than $1 billion in free cash. The 2021 figure has been distorted by a big exceptional cost, but either way, the trend is the same.
It has emerged that Musk is to cut 50 per cent of Twitter's workforce. Twitter employs about 250 at its Dublin base. There is no clarity yet on how Dublin will be impacted.
Cutting half the workforce will undoubtedly free up some funds — Twitter paid its workforce $630 million in stock-based compensation in 2021. Maybe, through cost-cutting, Musk can find enough efficiencies to meet Twitter's interest payments. But finding a more profitable business model — that will be much harder.
What Twitter does in Dublin
Twitter International Company, the group's Irish subsidiary located near Dublin's Silicon Docks, employed 243 staff at its most recent filings in 2020.
It booked €1.1 billion in revenue, which is about half of its global turnover. Although the Irish company has not yet released figures for 2021, documents filed in the US suggest that the revenue recorded in Ireland grew to around €2 billion last year.
Twitter International Company has also been the group's international intellectual property centre since 2019, when Twitter moved €7.9 billion worth of non-US IP rights to Ireland in response to the abolition of the former double Irish tax scheme.
As previously reported, Twitter initially hoped to reduce its future tax bills by €1.1 billion thanks to the amortisation of this intellectual property against profits taxable under Irish law. However, it quickly wrote off this tax asset, which has since appeared instead on the group's balance sheet as a maybe.
Twitter made that decision at the height of Covid-19, when the outlook for advertising was uncertain and the group was simply not sure enough of generating sufficient profits to get the full benefit of Ireland's generous Capital Allowance for Intangible Assets tax deduction scheme.
Whatever happens to Twitter under Musk's direction, the impact on the Irish economy will be limited. The size of its workforce, which has fluctuated around the 200 mark in recent years, places it among the smallest employers on Ireland's multinational tech scene. And, since it onshored intellectual property to Ireland three years ago, amortisation charges have turned Twitter International Company into a loss-making entity, accumulating tax credits and unlikely to contribute to Ireland's corporation tax take for many years to come.
Twitter's failure to launch
How Twitter's Irish subsidiary flipped a €6m tax bill into a €23m credit.