Carina Johansen/Getty Images
Before taking control of Twitter, Musk tweeted an open letter promising advertisers that Twitter wouldn't become a "free-for-all hellscape."
On Thursday, he did a listening tour on Madison Avenue, seeking to assure advertisers that "brand safety" would be a top priority.
But after some advertisers began to halt spending, with companies like General Motors pausing spending on the platform and advertising firms like Interpublic Group and Havas advising their clients to do the same.
After advertisers paused spending, Musk went on the offensive, tweeting that advertisers were causing a "massive drop in revenue," He continued: "Extremely messed up! They're trying to destroy free speech in America."
He also blocked (and later unblocked) at least one exec who had participated in Musk's listening tour:
—Lou Paskalis ???????? (@LouPas) November 4, 2022
Then, Musk threatened to "thermonuclear name and shame" advertisers who paused spending on Twitter.
—Elon Musk (@elonmusk) November 4, 2022
Musk is explicitly threatening advertisers, which is a dumb move for multiple reasons. Let's get into them.
Per Twitter's 2021 earnings report, it made $5 billion in revenue last year. Of that, $4.5 billion, or nearly 90%, was from advertising. Like Meta or Google, Twitter's core business is selling ads.
The advertising climate is already challenging. Advertisers are spending less. Per a Standard Media Index report, total advertising spending was down by 5% year-over-year in September.
Other advertising giants like YouTube and Meta reported year-over-year declines in advertising revenue, with YouTube down by 2% and Meta down by 4%.
Even before Musk took charge, advertisers were already leaving Twitter. A report from MediaRadar showed the total number of advertisers on Twitter went from 3,900 in May 2022 to 2,900 in September.
Musk is now threatening any advertiser still using Twitter that he'll retaliate if they stop spending for whatever reason during a harsh macroeconomic climate. As Terry Kajawa, CEO of Luma Partners, pointed out, it's not a great sales pitch.
—Terence Kawaja (@tkawaja) November 5, 2022
What Musk may or may not understand is that advertisers don't need Twitter.
Companies Meta and Alphabet have ad offerings that are difficult to replicate.
Meta's direct response advertising business — ads that convert eyeballs into downloads, sales or newsletter signups — was until recently unrivaled, even if it has been weakened by Apple's recent changes to mobile tracking.
Google's search engine ads are essential spending for any business that wants its products to stay visible. And YouTube is one of the few places that serve as a replacement for broadcast TV advertising.
Twitter, meanwhile, has always specialized in brand advertising — ads meant to engender goodwill in consumers — and lagged in direct response ads, with a split of 85% brand advertising to 15% direct response in 2021.
The competition for brand advertising is fierce, with plenty of options for advertisers to pick from (including media outlets like this one). Advertisers can safely dial back spending on Twitter and know they can shift that spending elsewhere without issue.
Brand advertising relies highly on "brand safe" outlets where ads won't appear near objectionable content like violence, pornography, or hate speech. Meanwhile, during Twitter's 50% staff cuts, 15% of Twitter's Trust and Safety team was laid off, per Yael Roth, Twitter's head of safety and integrity. (Roth said front-line moderation teams were untouched.)
—Yoel Roth (@yoyoel) November 4, 2022
Tech and media analyst Ben Thompson wrote that Twitter "failed to build a reliable direct response advertising business (either through incompetence or because the platform is fundamentally unsuited to it, or both)." Brand advertisers, he continued, are much more sensitive to where they place advertising. "This, by extension," Thompson wrote, "means these companies have much more influence on Twitter, as Musk appears to be discovering."
Jason Kint, CEO of trade organization Digital Content Next, posted a long thread pointing out that Twitter is stuck between two models, premium brand advertising, where a lack of transparency around moderation makes brands nervous, and cheap direct response, where Twitter can't compete.
—Jason Kint (@jason_kint) November 6, 2022
In short: Musk lacks any real leverage beyond threatening to sic his 110 million followers on brands that displease him. It may be satisfying to Musk in the short term, but it's hard to see how it reassures any brand that committing ad dollars to Twitter makes sense.
Musk also is taking all of this a bit too personally. Advertisers usually pull back from platforms during times of upheaval or uncertainty.
Advertisers pause spending on YouTube regularly in response to controversies, including significant boycotts from advertisers in 2017 and 2019.
Advertisers halted Meta ad spending on a regular basis in the past decade, including a moment in July 2020 when 56% of advertisers paused all spending on the platform.
Those advertisers returned because they needed the reach these platforms provide. But Alphabet CEO Sundar Pichai and Meta CEO Mark Zuckerberg also didn't threaten those brands, especially not via the platforms they want advertisers to use.
Musk, of course, is not like other CEOs. His belligerence towards advertisers might be part of his plan to make Twitter less reliant on advertising revenue. His breakneck pace in rolling out the enhanced subscription product Twitter Blue could be proof of that.
But the math of replacing advertising revenue on Twitter is daunting.
Per MediaRadar, General Motors spent an average of $1.7 million per month on Twitter before pausing its ads. Interpublic Group, which recommended its clients like Amazon, MGM, and Bank of America pause spending, accounted for an average of $31 million in monthly ad spend. Havas, which also recommended a pause to brands like Progressive and Netflix, averaged $7.5 million in monthly spending.
To replace the $40 million in lost monthly revenue, Twitter would need to sign up a little over 5 million Twitter Blue accounts paying $8 a month in its first month.
For comparison, HBO Max signed up 4.1 million new users in its first month. How likely is it that the new Twitter Blue will have a more successful launch than the streaming service offering Game of Thrones and every episode of Friends?
The other significant source of revenue for Twitter has been data licensing or selling information about user demographics to other companies, which brought in $500 million in 2021. Twitter could mine users' data more aggressively. But this is a crowded field with established players like Experian already offering more substantial products, and Twitter's data isn't particularly unique.
Musk may be able to build a version of Twitter where more revenue from more diverse sources means he can be as punchy with advertisers as he is with other tech CEOs, journalists, and his own employees. But for now, whether he likes it or not, he needs them.
