What Kind of Business is X Now?

Two years after Elon Musk acquired the social platform, it's fair to wonder if it's even a business at all.

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Episode Transcript

Speaker 1 (00:00):
What kind of business is X now? By Kurt Wagner
Read by Mara Fennerdy Bloomberg Knew Senior reporter Kurt Wagner
covered the ins and outs of Elon Musk's takeover of
Twitter now X in his book Battle for the Bird,
Jack Dorsey, Elon Musk and the forty four billion dollar

(00:21):
Fight for Twitter's Soul Atria Books, twenty twenty four. But
Musk and X have been busy since. In this next chapter,
Wagner revisits the platform's business and how it has fared
under its new owner. On the day that Elon Musk's
forty four billion dollar bid for Twitter was first made

(00:41):
public back in April twenty twenty two, the world's richest
man sat down at the TED conference in Vancouver and
said something that at the time sounded a little preposterous.
Buying Twitter, Musk said, was not a way to sort
of make money. My strong intuitive sense is that having

(01:01):
a public platform that is maximally trusted and broadly inclusive
is extremely important to the future of civilization. I don't
care about the economics at all. Fast forward six months
to when Musk's deal finally closed, and it quickly became
clear that his altruism may have been slightly exaggerated. Most

(01:24):
everything he ended up doing during his first few months
as Twitter's new owner signaled that he was very much
a man who cared about the economics of his new
social network. Musk slashed headcount by nearly eighty percent in
a matter of weeks, stopped paying twitters landlords, lawyers, and vendors,
and warned employees that the company might go bankrupt, a

(01:47):
series of chaotic and aggressive moves that I covered extensively
in my book about the takeover Battle for the Bird.
In the two years since that frenetic slash and burn, though,
it's become clear that Musk prescient to set low financial
expectations for Twitter now called X, Advertisers that provide the
bulk of X's revenue have largely retreated and cut back

(02:10):
on spending. A subscription business Musk was banking on hasn't
lived up to expectations, and his plan to turn X
into a payments and banking powerhouse hasn't materialized. Even with
an expected boost in sales this year, x's advertising business
is projected to be roughly half of what it was
when Musk took over as a money making endeavor. Buying

(02:33):
Twitter for forty four billion dollars looks like a rare
misstep for a man who seems to be creating the
future more often than preparing for it. But as we
saw during the twenty twenty four US presidential election and
with Musk's new found role in the federal government, it's
clear that X's value to its owner is not constrained

(02:55):
to the company's balance sheet. When Musk merged X with
his AI startup Xai in March, it served as further
proof that trying to value X in the way you
might a more traditional social networking business is probably a mistake.
But if not that, then what kind of business is it?

(03:16):
And is it foolish to think of it as a
business at all? Right now, it feels like there are
two plausible theories. The first is that X is a
data business, hence the Xai acquisition, and that its main
purpose moving forward is to continue generating new posts from
users that can be used as fuel for training large

(03:38):
language models. The second, which has been part of the
company's story since long before Musk arrived, is the idea
that X is less a profit making enterprise than a
tool for cultural and political influence. Its value in that
sense is almost impossible to truly quantify. X didn't respond

(03:59):
to a request for comment, But to understand both of
those cases, it helps to start with the business models
X has tried already and why they haven't worked. To
understand what X is today, we first need to understand
what X was when Musk acquired the company back in
late twenty twenty two. For nearly all of X's existence,

(04:22):
the company has been reliant on an advertising business that,
while not exactly small, has largely underwhelmed. Before Musk showed up,
advertising revenue was four point five billion dollars per year,
which made up eighty nine percent of Twitter's total business.
Part of the problem, though, is that Twitter has always

(04:43):
focused on what the industry refers to as brand advertising,
the kind of messaging that you see on billboards and
TV commercials that makes you associate a summertime beach holiday
with an ice cold Coca Cola. Roughly eighty five percent
of Twitter's advertise asing revenue came from brand marketing when
Musk acquired the company. Twitter has faced two major issues

(05:07):
with this strategy. First, tech giants like Meta and Google
have learned that advertising on the Internet is significantly more
effective when you focus on hyper targeted ads, what the
industry calls direct response advertising. Because those messages are so
targeted and specific, they are meant to elicit a particular

(05:28):
action from a consumer, like a website visit, an app download,
or a product purchase. Generating a specific outcome also makes
these ads more expensive for advertisers and more lucrative for
companies like Meta and Google. Twitter never invested enough into
the technology necessary for these hyper targeted messages. Instead, it

(05:51):
kept relying on selling the Coca Cola beach ads, which
was a fine but not excellent business model. The downside
of this strategy is that it meant Twitter ads never
became a must buy for marketers in the way that
ads on Meta and Google did. Second, if your business
is dependent on advertisers creating a feel good association between

(06:12):
their product and the user, you can't put their ad
alongside content that makes people angry. An ice cold Coca
Cola is supposed to make you think about that warm
beach holiday, not a racist or pornographic post from an
anonymous X account. Once Musk took over and eliminated many
of x's speech rules and guidelines, many advertisers determine the

(06:36):
service was no longer a safe enough place to promote
their brand messaging, and because Twitter was rarely considered a
must buy for marketers, it was an easy company to
walk away from. Once Musk entered the picture, advertising sales
fell by roughly fifty percent virtually overnight, as marketers decided
to pause or pull spending. Instead of recognize the issue

(07:00):
and making significant changes to its content policies, or even
just reassuring brands that he understood their concerns, Musk dug
in his heels privately, as I wrote about in my book,
he talked about his desire to go to war with advertisers. Publicly,
it was somehow worse. In late twenty twenty three, he

(07:23):
told marketers to go f themselves from the stage at
a conference. X still hasn't figured out how to reverse course.
The platform's advertising sales are projected to increase by sixteen
point five percent globally this year, which would still be
just fifty percent of the business it pulled in the

(07:43):
year before Musk took over, and only zero point four
percent of total digital ad spending in the US according
to E Marketer, and while any increase at this point
certainly sounds like a step in the right direction. There
is a major caveat Many advertisers are starting to spend
money on X again out of fear of angering Musk,

(08:05):
who has amassed immense power as arguably the top political
advisor to President Donald Trump. X has also started suing
some marketers who don't advertise on the service, creating even
more fear for brands. Some are making the calculation that
a token payment to X and Musk is better than

(08:26):
potentially going to court. Lou Pascalis, an ad industry veteran
and chief executive officer of the consulting firm AJL Advisory,
told me earlier this year, you're buying insurance, You're not
buying advertising. He said, Bullying marketers into giving you business
doesn't feel like a sustainable strategy or a sign that

(08:49):
things are truly headed in the right direction. So if
X is not a reliable advertising business right now in
twenty twenty five, what kind of business is it? The
short answer is, we don't know. Nothing else has materialized
to fill the advertising void. That's not necessarily for a

(09:10):
lack of ideas. Musk has floated several possible products and
features that could lead to new revenue for the company.
They just either haven't worked or haven't yet been created.
The most notable has been X's push into premium subscriptions,
which was a key Musk priority during his first few
weeks in charge. On the surface, that strategy makes sense.

(09:35):
Certainly X has some die hard users willing to pay
extra for additional features right. Musk centered the subscription model
around the blue checkmark verification badge, which had long been
a status symbol on Twitter, since it often signified that
a user was prominent or famous. So Musk, assuming everyone
would want this status, started selling them for eight dollars

(09:58):
per month. But it it turns out that a status
symbol is much less meaningful when anyone can buy it,
and the result has been a largely underwhelming business, at
least so far. There was a time in late twenty
twenty two, shortly after Musk took over the company, that
he believed X would generate one billion dollars per year

(10:20):
from subscription revenue. It's nowhere close. By late twenty twenty four,
the company had made and estimated two hundred million dollars
from in app purchases, and that was over a three
year period starting in mid twenty twenty one, well before
Musk's takeover. That revenue doesn't even account for the fees

(10:41):
that Apple and Google take out. Is an estimate full
of caveats. To be sure. Not everyone pays for their
ex subscription through the app, for example, But even if
the real number were double, and even if that new
much larger number were generated in just one year instead
of three year, X's subscription business would still lag far

(11:03):
behind Musk's own prediction. Subscriptions I think we can say
are not a significant business for X either. So X
is not a meaningful advertising business. It's also not a
subscription business. It's not a payments business, considering it doesn't
offer any payments products, though Musk would certainly like to

(11:24):
turn it into one someday and is applying for payments licenses.
And it's not a video business either. Despite an effort
last year to launch several highly produced video shows with
a hope of giving X a TV but on your
phone kind of feel, those have largely flopped and, in
the case of former CNN star Don Lemon, have led

(11:46):
to an ugly lawsuit. The Xai acquisition suggests that the
most valuable thing X has going for it in twenty
twenty five is its data. Social networking data, posts, comments, videos,
profiles have taken on a heightened value as training fuel
for the large language models that power chatbots like xais groc.

(12:11):
X still has millions of people posting to its service
every day, and many of those posts are about current
events like politics, sports, or business. Venture capitalists and Musk
pal Chamath Palahapatea called that data set the most complete
corpus of scaled real time information on the Internet. What

(12:32):
is that data set worth? Again, it's hard to say,
but Reddit, which also has a corpus of scaled real
time information, has content licensing agreements with both Google and
Open Ai, which use the data to train their AI models.
The Google deal amounts to roughly sixty million dollars per year.

(12:53):
A separate Open Ai content licensing arrangement with NewsCorp is
worth around fifty million dollars per year. So while X's
constantly growing data set has clear value, it's tough to
argue it's worth more than whatever x's advertising business brings
in each year. Given how instrumental Twitter now X has

(13:14):
been to public discourse over the years especially within the
world of American politics. Considering how often Trump used to tweet,
I often find that people are shocked to learn just
how small its business is compared to its social networking peers.
X is routinely mentioned in the same breath as Facebook
and YouTube, for example, Yet those two rival platforms dwarf

(13:37):
X if you look strictly at the economics. It's a
small fish playing in a very big pond, and its
value has historically been derived more from this cultural influence
than its financial statements. This reality distortion around X has
only amplified since Elon Musk took over the company. The

(13:58):
business has gotten smaller. X's cultural relevance, though, has arguably
gotten bigger, or, if not bigger than, certainly more controversial.
Look no further than the twenty twenty four US election.
Rich billionaires have tried to sway presidential elections for decades
in the US, yet none of those efforts ever felt

(14:21):
quite like what we saw from Musk last fall. One
difference is that Musk also had control of a global
social network that he used to push his agenda to
the masses and amplify those who agreed with him. He
made himself the face of an entire presidential election, and
thus put X at the center of that election too.

(14:43):
It was a bet that ultimately paid off, as Trump
won the White House and Musk now has a major
role in his administration. As long as Musk remains relevant, rich, powerful,
and controversial, I expect X to continue to punch above
its way as an influence machine, even if that influence

(15:03):
may sometimes be negative. There's a problem, though, with building
an entire social network around one person, especially when that
person is as polarizing and controversial as Musk. X has
become dependent on Musk's ability to constantly serve as the
main character, and it's a strategy that simply isn't sustainable.

(15:25):
Musk has already pushed millions of Twitter users away to
rival platforms, and his favorability is declining fast according to
Yugov polling data. Some critics will stick around for schadenfreud,
but eventually Musk will run them off entirely. Perhaps Musk's
commentary from the Ted stage that the economics of X

(15:47):
don't matter was astute. X can have a struggling business
or no business at all, and yet it will continue
to operate so long as Musk desires a global megaphone
he can afford to keep the lights on no matter
how the business ultimately fares. But we've also already seen
what a social network built around one person and one

(16:08):
political party looks like true social and it's a limited
and generally meaningless business beyond its personal value to just
one user. Musk said he wanted Twitter to become maximally
trusted and broadly inclusive. So far, it hasn't accomplished either.