From Bloomberg, February 22:
The company’s IPO prospectus makes clear how dependent it is on unpaid labor and the whims of its community.
Reddit’s prospectus for its initial public offering finally dropped on Thursday, complete with the customary list of “risk factors” that the company thinks could give it headaches in the years ahead as a public company. At 40,000 words, it’s longer than Facebook’s and Twitter’s risk factor statements combined at the time of their listings.
As with IPOs past, many of them are boilerplate. An earthquake would be bad for Reddit’s business, for instance, particularly if it happens to occur within shaking distance of the company’s San Francisco headquarters. Also, the company faces many external threats common among several companes, such as losing the traffic it gets from Google, a collapse in the online advertising economy or the threat of World War III. All standard stuff.
Where Reddit differs among its tech peers — and where the company needs to go into great detail — is in its striking dependence on its user base to keep things operational. More so than any other online business I can remember, Reddit must keep its users satisfied on several important and delicate fronts.
First, it acknowledges that efforts to expand its limited (and already unpopular) advertising formats could send users packing. The majority of the company’s 73 million daily active users are there just to browse. Pulling up stakes and browsing elsewhere, if the ads become too annoying, is trivial when compared with the gargantuan effort required to leave Facebook, X or other platforms. Even if they don’t leave, Reddit users lean toward the tech savvy and won’t hesitate to employ ad blockers in large numbers (if they don’t already). For the past two years, the filing stated, 98% of Reddit’s revenue is made up of advertising income. And of that, 26% came from just 10 ad clients in 2023. Investors will be watching this closely and expect more diversity sooner rather than later.
Then, there’s the small matter of all the unpaid labor it relies on to keep things even remotely civil. There were 60,000 active daily moderators using the platform in December 2023, the filing stated, though it didn’t offer any historical comparisons — investors may want fuller disclosures around that figure to determine whether the number of active moderators is declining. That worked out to just more than 1,200 users for each moderator.
The going rate for a content moderator around the world varies greatly, but for the sake of expedience, let’s say it might average around $50,000 a year. That’s $3 billion worth of free labor. Reddit has only 2,013 full-time employees of its own and thus is relying on these passionate volunteers to stop its website from descending into chaos and keep advertisers from rushing to the exits.
As the site grows, the job of moderator becomes more burdensome for the volunteer and riskier for the company. “Mods,” as they are known, may disagree with the company on what constitutes offensive or inappropriate behavior, and as efforts to monitize grow, this will be a flashpoint. The site, it’s worth stating, is chock-full with pornography, some of which might be considered, by some, as pushing the boundaries of the morally acceptable. Even those users who don’t consume that content will reflexively resent any efforts to sanitize one of the edgier corners of the internet.
Fallout could be swift and effective, the filing warns. “Moderators can also band together and, for various reasons, decide to shut down the normal operation of their communities” and “reduce the amount of monetizable content generated by Redditors.” This could all happen in a flash, though the company said that a recent coordinated protest — in which several popular subreddits shut themselves down — did not have a material effect on the business....
....MUCH MORE
Couldn't have put it better myself, although I tried:
February 18
Ahead Of IPO Reddit Has A New AI Training Deal To Sell User Generated Content
Sounds like Arianna Huffington and the unpaid contributors at the Huffington Post.
"Reddit is going public and inviting power users to invest" (plus semi-variance vs. standard deviation as a risk measurement)
Following on the dirty hedge post immediately below, this is more akin to a "Texas-hedge" by Reddit management. Unlike a hedge which (theoretically) reduces exposure, a Texas hedge increases exposure to risk. There are many explanations of the origin of the term but the one time I saw it put into action was when a trader was long an equity option position and bought the underlying to goose the option into the money for what reason I know not. That same guy used to mark the close on positions that were close to getting him a margin call, a different form of increasing your risk and illegal in most jurisdictions, further increasing your risk.
The reason the Reddit management's game-plan increases their risk is if the stock goes south after the IPO they will not only have a loss but also have a bunch of their power-users angry with them. Power-users who have a platform they can use to vent/cathart or boycott as they may see fit....
