Twitter Acquisition: Why fake accounts have suddenly become so decisive for Elon Musk?

Twitter openly declared that less than 5% of accounts are fake. All of sudden, it became a sticking point for Elon Musk who had left no stone unturned to buy Twitter. While experts have put Musk's commitment to acquire Twitter under a cloud, the real reason behind fake accounts on Twitter becoming a near deal-breaker for Musk has some insightful tale.

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The acquisition of Twitter Elon Musk made was so touchy about, suddenly soured. The Twitter acquisition deal surprisingly hit an unexpected roadblock on Friday when Musk decided to put the deal on hold. He tweeted that the deal was “temporarily suspended” due to concern about the sizeable number of spam and bot accounts on Twitter.

Referring to a Reuter’s report citing Twitter’s Q1 2022 filing in SEC earlier in the month, Elon decided to take a step back, albeit temporary. In the public filing, Twitter stated that fake accounts account for less than 5% of all monetizable users on the micro-blogging platform. Musk was skeptical, saying that he needs “details supporting calculation” that spam/fake accounts represent less than 5%.

His tweet immediately caught the eyeballs of millions of people and the news spread like a wildfire on the internet.

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Sensing intended possible damage to his own image, also to Twitter, two hours later, Musk assured that he was still “committed” to acquisition. But by then damages were done. Twitter shares fell more than 9% Friday.

While Musk’s critics were quick to use the word “betrayal”, analysts believe it’s a well-planned strategy that Musk has executed with an intention to squeeze more from Twitter.

The experts believe that the unexpected move is made with an intention to renegotiate a lower price or give up on the acquisition altogether because of concerns about the market potential. Both, Twitter and Tesla share prices have declined in the weeks following Musk’s deal to buy the social media platform. This could make the acquisition less appealing for Musk.

“I believe he’s still committed in theory, probably at a lower price,” Dan Ives, a managing director of equity research at Wedbush, an investment firm, who closely follows the tech sector, while talking to ABC News.

“It starts to be a boy that cried wolf.”

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Musk is a complex figure who defies easy assessments of his thinking. But this is not the first time when he has expressed his concerns about Twitter’s fake accounts.

Just a few days before signing the deal to acquire Twitter Musk tweeted “If our Twitter bid succeeds, we will defeat spambots or lose trying!”

Two main reasons that might be making Musk extremely concerned about fake accounts are:

  • They pose a threat to the company’s business model.
  • They also have the potential to damage the platform’s credibility as a place for authentic discourse between real users.

Just like Facebook, Twitter relies on advertising dollars. Ads account for nearly 99% of Twitter’s annual revenue. This means that Twitter’s business relies heavily on the number and quality of the actual users who view the ads and could interact with them. Twitter calls them “Monetisable users”, an important metric that users project in its official documents and financial reports. Needless to say, fake and bots accounts are just feasting on the cost of Twitter.

In Q1 2022, Twitter reported having 229 million monetizable users. This is a 15.9% YoY growth. Twitter booked $1.2 billion in revenue from the first quarter of the year; $1.11 billion of it came from advertising alone.

If there are more bot or spam accounts than the company estimates, it could reduce the number of users who can be monetized and the revenue they generate. This could lead to a decrease in revenue as well as profit for Twitter.

It is crucial to estimate the accurate number of fake accounts on the platform. Considering that real users are key to estimate future growth in revenue streams via ads or paid subscriptions, the justified valuation of the platform can’t be evaluated in the absence of these numbers.

In one of his previous comments, Musk referred to another source that explained that bot accounts must be concerning as the platform’s value will decline if Twitter posts are not trusted to be genuine remarks by actual humans.

“This is why we have to get rid of bots, spam, and scams. Are you genuinely expressing public opinion, or are there 100k fraudulent accounts? He added a follow-up tweet minutes after.

After the 2016 US election, it became more common for people to be suspicious of fake accounts on social media platforms. It was discovered that Russian operatives used these accounts to spread misinformation. Twitter increased its efforts to delete suspicious or fake accounts in 2018, suspending more than 70 million accounts between May and June 2018.

Twitter, for its part, also acknowledged the difficulty in accurately estimating fake accounts on the platform. While filing the quarterly report in April, Twitter stated that fake accounts account for less than 5% of its users. However, it added this cautionary note: “In making this determination, we applied significant judgment, so our estimation of false or spam accounts may not accurately represent the actual number of such accounts, and the actual number of false or spam accounts could be higher than we have estimated.”

Musk agreed to purchase Twitter for $54.20 per share last month. This represented a 38% premium over the share price on the day the Twitter board accepted his acquisition offer.

But, spam and fake accounts on Twitter are not the only hurdle for Musk. His bitter relationship with the Securities and Exchange Commission is well known. Now, he is being investigated by the Securities and Exchange Commission (SEC) for failing to notify regulators about a 9.2% share in Twitter that he purchased earlier this year. Besides, the Federal Trade Commission is also looking into the acquisition for possible violations of antitrust reporting rules.

Musk’s announcement on Friday to put the Twitter deal on hold puts the acquisition in jeopardy.

Musk, on the other hand, assured that he is committed to acquiring Twitter. Unfortunately, many analysts have put him under the cloud and are quite skeptical about the deal reaching its earlier intended conclusion.

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