How Elon Wins

To purchase Twitter, Elon loaded the company with over $13B in debt. That means he has to increase Twitter’s cash flow—fast. The company will be paying $1B a year just in interest payments. One of many problems is that the company only did $632M in operating cash flow last year and has averaged roughly $1B over the last five years in yearly operating cash flows. Meaning that Elon will have to increase Twitter’s last year’s cash flow by roughly $380M just to cover the costs of the loans. Add in all the other costs of running Twitter and the company is in a tough financial spot. They need to scale revenue, increase productive investment, and simultaneously decrease costs. Typically in finance you can only pick two of those.

Elon has two levers to turn Twitter into the cash machine he needs it to be in order to service his debt payments. He can raise advertising revenue or add a subscription component to the business. Unfortunately, both of these are bad options.

Twitter's advertising machine is broken and unsalvageable because of Elon’s brand risk and the inability to build a direct response platform. Subscriptions will only serve to disincentivize creator behavior and thus will make the product worse. Even if he does figure these things out, the elephant in the room is that the dominant social paradigm has shifted to video.

To alleviate these problems, Twitter needs to reinvent what it means to be a consumer internet company. The company should use its interest graph to build an algorithmic marketplace that allows outside parties to change the content format and engagement modalities. 

I get it—I’m just as tired as you are of this story. Politicians, pundits, podcasters—everyone is trying to get their pound of Elon flesh, hoping to drive clicks to their website. Missing in all this chatter is a thoughtful analysis of what the problems and potential resolutions are. But this is a company worthy of serious study. Twitter is a perfect case study of the shifting power dynamics of the ad market and how to make money in this era of the internet. 

Alter the product paradigm

Twitter is a special place because you can have porn, a note about policy from the president of the United States, and a highlight from last night’s World Series game all in a row, in one browser. There isn’t anything else quite like it—especially because Twitter stopped making great products in 2013.

On March 21, 2006, Jack Dorsey sent the very first tweet informing the world he was "just setting up my twttr." (This same tweet sold as an NFT for $2.9M at the height of the crypto craze.) The product started with social updates, with many early users letting people know what they were up to. Over time users started to share news and events as they happened, often using Twitter as a live-blogging platform. In 2007 the hashtag, which allowed for users to easily follow specific events or topics, was created. The company tried various experiments, but all were focused on the text format. It wasn’t until their IPO in 2013 that native photos and videos were added to the feed. At that point, they stopped launching significant new products. There were half-hearted attempts at various things (including a music product called Twitter #music in 2013 that the world has collectively forgotten about) but at its heart, Twitter has stayed the same.