Comment by dangus | Hacker News Reader

Comment by dangus | Hacker News Reader

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Beyond merely surviving, Twitter has to compete with other companies and enhance their product over time.

What happens if someone like Bytedance decides to launch a Twitter clone that does everything better?

Meta takes a lot of criticism for being Meta but you have to hand it to them, they've copied every other innovative social media feature that has shown up in competitors' products.

Does Twitter have enough staff to launch a major new feature?

The problem is that Twitter is now saddled with debt. It probably can't make investments in new products, and we can speculate whether it has the necessary headcount in the sales staff needed to maintain advertiser relationships that pay 90% of its revenue. [1, 2] Enterprise clients usually expect a dedicated CSM relationship.

That's exactly what happened to Toys R Us, which slid into liquidation due to the debt saddled on it by its private equity firm rather than a fundamental issue with its business.

In 2021, Twitter had a net loss of $221.4 million, and in 2020 they lost over $1 billion. Revenue was around $5 billion in 2021, about 90% from advertisers. [1]

The company (not Elon) is now loaded with $13 billion in debt. [2]

> Last year, Twitter’s interest expense was about $50 million. With the new debt taken on in the deal, that will now balloon to about $1 billion a year. Yet the company’s operations last year generated about $630 million in cash flow to meet its financial obligations. > > That means that Twitter is generating less money per year than what it owes its lenders. The company also does not appear to have a lot of extra cash on hand. While it had about $6 billion in cash before Mr. Musk’s buyout, a large portion of that probably went into the cost of closing the acquisition. > > That gives Mr. Musk little wiggle room, Mr. Pascarella said. “They are essentially going to take all the financial resources of the company and just pour it into servicing the debt,” he said.

I personally don't see how Twitter gets out of this without bankruptcy. I think Twitter can go the next 5 years without an infrastructure outage and still likely ends up bankrupt.

[1] https://www.wsj.com/articles/how-elon-musks-twitter-faces-mo...

[2] https://www.nytimes.com/2022/10/30/technology/elon-musk-twit...

ByteDance I could see, but Meta and Google are hamstrung by the innovator’s dilemma to a degree: Both companies have the money and the technical smarts to pull it off, but their management structures would wreck it immediately because it poses a threat to other internal empires.

There is an innovators dilemma for Meta definitely, but I don't see it for Google

My loose guesstimate is that Elon has cut $2-3bn in expenses so far. I don't know the revenue hit yet, but $1bn in interest expense with $2.6bn in cash flows seems entirely sustainable

I think your numbers are generous. I don't know that Twitter can cut that much expense and remain in a stable state.

Take a look at Twitter's Income Statement from 2021: https://finance.yahoo.com/quote/TWTR/financials/

I think the income statement shows that it would be difficult for Twitter to find $2-3 billion of expenses to cut and still remain a competitive, functional company. You're talking about cutting total expenses by over 50%, including expenses that are not salary.

2021 total expenses of $4.8 billion on a revenue of $5 billion. $1.8 billion cost of revenue, $3 billion operating expense. Out of the operating expense, $1.175 billion is in Selling & Marketing Expense. $1.25 billion in R&D.

Let's say Twitter cuts R&D to $0, that's a $1.25 billion savings. How long can a social media company remain competitive putting $0 into R&D? Are there any examples of any software-adjacent company surviving that spends $0 on R&D?

If they cut SG&A, that will impact revenue negatively. Activities like marketing and sales have an ROI. You spend money to make money. Twitter was spending $600 million a year on SG&A in 2014 when they had less than half their current level of daily active users (DAUs). Twitter has a product, its daily active users. If they can't sell that product to its customer (advertisers) because it doesn't have enough sales staff to physically make the required phone calls (yes, they do that sort of thing with large advertisers), they risk entering the death spiral.

Cost of Revenue: I don't think this line item can be cut beyond a certain level. This is the direct cost of delivering the product. Anything that isn't employee salary can't be cut very easily. Twitter can't turn off servers and sell off data centers without impacting the product.

Twitter had more than 7,500 employees in 2021.

If they cut 80% of staff, that's 5,000 employees gone (and don't forget that those cut employees will still count as 1/4 of an employee for the next year due to the severance payment).

If each employee represents $300,000 in total expense (a very generous estimate), that's only $1.5 billion in savings, and for the first year the savings is only $825 million due to the severance payments.

Okay, maybe Twitter can raise revenue with Twitter Blue. They'll need to pick up a smidge over 15 million paid Verified users in order to cover the $1 billion interest expense. Twitter currently has 400,000 Verified users, ~240 million DAUs, so they need 6.25% of their global user base to purchase a subscription at $8/month. Out of Twitter's DAUs, you'll need to omit most users from countries that won't generally pay $8/month, like India, Brazil, and Indonesia. [3]

For reference, Spotify costs $1.46/month in India.

We could make a rough guess at this by assuming that the 155 million people in the US, Japan, and UK will pay $8/month for Twitter Blue, so you'd need close to 10% of the affluent user base paying for Twitter Blue.

For a benchmark, Discord makes almost all of its revenue from Nitro subscribers. In 2020 it had 14 million DAUs, with $130 million in annual revenue, which means with the $99/annual fee Discord had 1.3 million paid subscribers. In other words, about 10% of Discord users are paid subscribers. [1]

If Twitter can get the same subscriber rate with Blue, it'll reach $1 billion they need to pay off their loan interest, assuming Twitter Blue incurs no additional cost.

The problem is, it can't do that without that pesky R&D that we were talking about earlier. Discord is built around the concept that Nitro offers tangible benefits to paid membership. What features can Twitter build with a skeleton crew that will convince 10% of their users to pay for the service? Twitter Blue currently represents very basic functionality. [4]

I haven't even talked about the fact that I'm just talking interest payments for the debt, and the fact that Twitter wasn't profitable to begin with!

[1] https://www.businessofapps.com/data/discord-statistics/

[2] https://www.businessofapps.com/data/twitter-statistics/

[3] https://www.statista.com/statistics/242606/number-of-active-...

[4] https://help.twitter.com/en/using-twitter/twitter-blue-featu...

> Okay, maybe Twitter can raise revenue with Twitter Blue.

This made me laugh. Twitter Blue will have to be great for people to pay. Out of all your numbers, I wonder how many of those 155M users in the US actually post anything that would find value in Blue? My guess is that we're seeing Pareto in action where 80% of the Twitter content comes from 20% of the users.

I heard an interesting take today from someone in the social space. Basically as soon as they heard the price paid for Twitter, they knew it was over. It's just too much debt to both get out from under and move the company in the right direction.

I've started to come around that maybe it is that simple. Musk saw the debt payment and just cut the most easily cuttable expense in the short term - people. Bankruptcy seems inevitable.

I 100% agree with you. I don't even know how seriously Musk can try to avoid bankruptcy.

The leaked company communications are damning. Here's your brand new owner, richest guy in the world, implying the company might not survive another year or two, for a company that's been public, mature, and stable for years. It's completely insane.

Like I alluded to my comment, Discord's revenue story is essentially a best-case scenario type of benchmark. It's very unlikely that Twitter or anyone else in the social media space can replicate Discord's paid user share. Discord has been designing their product around a specific niche and optimizing for non-advertising revenue since inception. Twitter is designed for advertisers. It was never intended to be a paid product. They'll be lucky if 1% of their users bite.

I told you what I think he cut. I also said I don't know what that does to their revenues, but you don't either.

If you buy the narrative that 80% of employees were bloat and you can cut them without impacting top line, then it will work. If you think he's gutted essentially activities that will sink the ship, then it won't

> Twitter can't turn off servers and sell off data centers without impacting the product.

A friend of mine tried to tell me that Elon had some type of new computing technology that would let them turn off most of their servers because they could fit all of the tweets in less space.

He blocked me after I told him he had confused Elon Musk with gzip.

I think your friend gets at why people think Twitters IT costs can be cut though (ignoring his idea about compression): They think Twitters product is mostly the delivery of tweets.

But's not. Twitters product is ad inventory and their ad placement platform, and the engine driving engagement that boosts their ad inventory by reordering the timeline to keep people scrolling. Those are the hard parts.

"Just" delivering and storing tweets is easy. If you ignore the nasty business of the moderation. And most people have never even visited analytics.twitter.com and seen how much data is available to them about their own tweets, much less looked at ads.twitter.com and seen how precisely they can be targeted, and the precision Twitter offers in what kind of things you can pay for (engagement, follows, media views, clicks). And they've certainly not tried running ad campaigns in those categories, and seen how good Twitter are at showing your ads mostly to people doing what you're paying for.

Musk's actions makes me wonder how well he understood the complexity of Twitter too. Surely he must have looked at those other aspects of Twitter before he made his bid.

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