Musk and Twitter fights continues.
Musk’s supposed excuse for terminating his deal to buy Twitter is that he imagines, with no evidence, that bot accounts make up more than 5% of Twitter’s monetizable daily active users. The theory is that Twitter says that fewer than 5% of mDAUs are bots, but if the number was really, like, 25%, then Twitter has been lying to shareholders and advertisers and that would be bad.
But the following is a funny Twitter thread from Daniel McCarthy at Emory arguing that if Twitter has lots of bots, then that’s good. After all, Twitter’s revenue is what it is; nobody is disputing that Twitter’s publicly reported financial information is correct. Twitter had $1.2 billion of revenue last quarter, with 229 million reported average monetizable daily active users. If 5% of those mDAUs are bots, then Twitter makes something like $5.52 per (non-bot) user per quarter. But if 25% of the users are bots, then Twitter makes something like $6.99 per user per quarter: Each real Twitter user generates more revenue than you thought, because there are fewer of them than you thought. Also, because there are fewer of them, the potential for future growth is higher: There are more people out there who don’t use Twitter yet and could be persuaded. If it turns out that Twitter has many fewer users than everyone thought, that is good for Twitter’s future business prospects, and thus for its valuation.
Now, this is not a complete analysis: If Twitter has been lying about its users to advertisers, the advertisers will be mad, and that probably won’t be good for future revenue. And of course all of this is dumb because there is no evidence at all that Twitter has been lying about the bots; Musk is just making stuff up to get out of the deal.
Still! Deep down, McCarthy is right. If you take Musk at his word, then the more bots there are now, the better this deal is for him. Musk agreed to buy Twitter for more than its market value. To justify that price, he would want to have some plan to improve Twitter, to make the business better, so that it would be worth more than its market price. If in fact it is the case that Twitter has lots of bots, then getting rid of the bots and growing the number of actual users would be a good plan that could make Twitter more valuable. The more bots there are now, the more upside there is for Musk.
And this analysis is so correct that it was in fact Musk’s analysis! Like, he said that! In the press release announcing the deal on April 25, Musk said: “I also want to make Twitter better than ever by enhancing the product with new features, making the algorithms open source to increase trust, defeating the spam bots, and authenticating all humans. Twitter has tremendous potential – I look forward to working with the company and the community of users to unlock it.” The business proposition for this merger was that Twitter has too many bots and not enough people, and that this created an opportunity for someone to reduce the bots and increase the people, and that Musk was the right person to seize that opportunity. How are we still talking about this!