Why Are Fake Accounts Causing Elon Musk To Potentially Question Twitter’s Business Model?

Prove It

Tesla (TSLA) CEO Elon Musk has put his plans to buy Twitter (TWTR) on hold unless the social media company can provide convincing data concerning the number of fake accounts. Market research firm SparkToro defines fake accounts as those that don’t regularly have a human writing the tweets.

Twitter executives claim fewer than 5% of accounts on its platform are fake. Musk has demanded evidence to support that assertion, and expressed his belief that the number is at least 20%.

Fake accounts matter because the business as it currently stands depends on advertising revenue. In oversimplified terms, advertisers are generally charged based on how many real people view their sponsorship campaigns. This annual advertising revenue then largely dictates Twitter’s overall market cap. If advertisers realize they are paying money to have their brands placed in front of fake accounts, they may leave the platform, which would then impact Twitter’s valuation. This is the argument Musk is making in broad terms.

Twitter’s Rebuttal

According to Twitter’s SEC filings, less than 5% of the platform’s accounts are fake. Chief Executive Parag Agrawal stated that it’s in the company’s self-interest to limit spam because it diminishes the customer experience. He said they routinely suspend over 500,000 fake accounts every day and lock out millions per week that aren’t verified by humans.

Musk remains skeptical and has encouraged others to join him in doing due diligence on Twitter’s reported numbers, in a sort of crowd-sourced vetting process. Agrawal essentially said good luck with that, since people outside the firm won’t have access to private data needed for accurate calculations.

The Deal Could Ultimately Fail

Some market observers have questioned whether Elon Musk remains committed to making the deal and wonder why he is raising the issue of fake accounts now. Musk stated “I relied upon the accuracy of Twitter’s public filings.” For what it’s worth, Twitter has reported the 5% estimate on previous reports as well, so it appears to be somewhat of a constant figure.

There is also speculation that Musk is using the issue as leverage to negotiate improved deal terms. While the acquisition has been on pause, Twitter shares have dipped below their level at the time of the initial offer. Musk’s fears of fake accounts are just one more turn for the Twitter takeover.

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