The Journal. - Can Reddit’s IPO Survive Its Own Users?

Episode Date: March 20, 2024

The social-media platform Reddit is making its stock-market debut Thursday and is offering a chunk of shares in its initial public offering to users, who are the lifeblood of its operations. But those same passionate users could cause trouble for the company. WSJ's Corrie Driebusch explains, and a moderator for the popular Reddit forum WallStreetBets weighs in. Further Reading: - Reddit Fueled Meme-Stock Mania. Now Its CEO Is Overseeing His Own Company’s IPO.  - They’re Reddit Die-Hards. Do They Want to Be Shareholders, Too?  - Reddit Eyes Valuation of Up to $6.5 Billion in IPO  Further Listening: - ‘To the Moon’  - An Oral History of WallStreetBets  Learn more about your ad choices. Visit megaphone.fm/adchoices

For about a decade, Neuer Al has been an active user on Reddit. I remember joining Reddit in the back of a math class. I think it was AP Calc, and I was just bored. I made this account so that I could troll people, and I decided to stick around and be a good contributor. But back then, Reddit as a whole was a very wild west. And I think that's what drew me and so many others into Reddit. It was just the absolute insane variety of forums with thousands or tens of thousands of people thinking about the same crazy idea you are. thinking about the same crazy idea you are.

Unlike other social media sites, Reddit largely relies on its users to determine which posts get the most visibility by upvoting ones they like and downvoting ones they don't. They interact using message boards known as subreddits. There's all kinds of different subreddits, like Today I Learned, where people post random facts they picked up that day.

Today I Learned, Thomas Jefferson was so impressed by macaroni and cheese during a visit to Paris that he wrote down the recipe and served it at a state dinner in 1802. There's Shower Thoughts, where users share random ideas that popped into their heads while in the shower. To not expose his identity, Batman is either driving the Batmobile uninsured or is committing insurance fraud. People are impressed by the uniqueness of snowflakes,

but potatoes are equally unique and no one cares. And there's also one of the more famous ones called Am I the Asshole? The subreddit where users vote on each other's questionable decisions. Am I the a**hole for using TSA PreCheck while my girlfriend went through the irregular line? Am I the a**hole for describing my mom's second marriage and her

younger kids as her do-over family? There are also many forums labeled NSFW, or Not Safe for Work, which I'll just leave to your imagination. Since it was founded in 2005, all these niche subreddits have made the site one of the internet's favorite playgrounds. Some 70 million people visit Reddit every day, and the company calls itself the front page of the internet. But it's never been a great

business. The company has never turned a profit. Now, Reddit is preparing to go public on the stock market. And for the first time, it will face real pressure to make money. And Noor says it's making some users nervous. I think that that's where the real risk is, is if Reddit has to bend to brand safety and to advertisers, does that mean that some of the edgier subreddits get shut down? More importantly,

does that mean that the core value proposition of Reddit being truly the front page of the internet, the whole internet, does that go away? Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudsen. It's Wednesday, March 20th. Coming up on the show, will going public change Reddit?

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In 2014, almost a decade after the company was founded, Reddit only made $8 million in revenue. Here's our colleague Cori Dreebush. I've talked with some investors who've said, oh, they didn't make any money, and I had to look it up because thinking that's crazy, but $8 million is very paltry. But in recent years, making money has become a much bigger focus, especially now that the company's planning to go public and take on

investors that will be eager to see profits. So really just figuring out, okay, we have millions of people who all come to this site every day, are so dedicated, they write so many great opinions, they give great advice. How do we make money off of it? And that was really, I think, the existential question for Reddit for a while. Now, the company does generate real revenue, mostly by selling ads. In 2023, the company brought in about $800 million, though it's still spending more money than it makes. They also were exploring, as a way to make more money this new data licensing avenue,

specifically for AI. And that's something that we're seeing that they just announced earlier this year with Google for data licensing. So that Google will pay Reddit so that it can access all of the Reddit posts and then use that to train its artificial intelligence models? Yes. Reddit is very valuable when it comes to training AI chatbots. But Reddit's path to earning more money has faced some opposition.

Its own users, who have occasionally revolted against the company's efforts. For instance, last year, Reddit said it would start charging third-party developers to access its raw data, known as its API. It used to be a free-for-all, and app developers could use the API to make their own versions of Reddit, like one that filtered out all the ads. use the API to make their own versions of Reddit, like one that filtered out all the ads. When the company announced the change, some Redditors rebelled and effectively shut down large portions of the site. More than 6,000 communities on the popular social networking forum Reddit have gone dark as moderators protest the company's decision to charge some third-party apps for the use of Reddit data. On a podcast last year, Reddit CEO Steve Huffman said he understood why some users might be upset by the changes,

which could result in some third-party apps going away. I get that. And I also totally get that, you know, the average user doesn't give a **** about our business, nor do we expect them to. But our business is our business, and Reddit is a business, and if we want it to continue to exist, we do need to stand on our own two feet. The Reddit boycott was largely driven by the site's most prolific users,

known as moderators. These are unpaid volunteers who are in charge of running the various subreddits. And some of these moderators have significant leverage over Reddit. Reddit for a long time has grappled with the notion of power moderators. And these are moderators who control a large number of subreddits with a larger number of users. That's newer Al again, who you heard from earlier. He's a moderator for one of the most popular subreddits called WallStreetBets. When Reddit was shut down for the blackouts, they lost probably roughly two, three days of revenue. That's not insignificant for a company at Reddit's size.

Noor says WallStreetBets didn't participate in the blackouts. Reddit now has to make money, and it's going to have to make more money once it becomes a public company. And yet when it tried to make more money last year by charging more for its APIs, the most loyal users didn't like that decision. And so they protested the company. So like, how is that going to affect Reddit's ability to make money if its users have sort of the power to say, no, please don't do this? power to say, no, please don't do this. Well, I think what we saw was that loyal Reddit users actually didn't have the ability to say, no, please don't do this because Reddit went ahead and did it anyways. Reddit very much holds all the cards in relation to moderators. Now, that being said, I think Reddit for a long time has struggled with this idea of monetizing its business at the risk of degrading the experience for users. We've seen greater and greater ads and posts and comments. So Reddit is kind of in this challenging place. One of the groups Reddit is most nervous about is Newers, WallStreetBets,

where a lot of everyday investors talk about stocks. The Wall Street Bets subreddit blew up in 2021 when its users rallied around shares of GameStop, a struggling video game retailer, and caused its stock price to skyrocket. Video game retailer GameStop is set to continue their head-spinning ascent today. Shares are now up more than 60% pre-market amid an ongoing battle between bullish day traders

and hedge fund short sellers that have bet against the stock. That moment in time was such a watershed moment for how powerful Reddit is and how powerful it can be in the social zeitgeist on the world stage. In Reddit's filings to the Securities and Exchange Commission ahead of its IPO, the company specifically names retail investors like the ones on WallStreetBets, as a potential risk factor. It says these investors could create, quote, extreme volatility for reasons unrelated to our underlying business, and that it could, quote, cause you to lose all or part of your investment.

cause you to lose all or part of your investment. And if you look at the WallStreetBets subreddit, the company might have reason to be worried. How would you describe the overall sentiment on WallStreetBets when it comes to this offer? Oh, absolutely negative. No doubt about it. WallStreetBets overall, and all of Reddit actually, is very bearish on Reddit as an investment.

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to have an opportunity to get in on the stock early. Here he is at a Wall Street Journal conference. I want the ownership that our users feel over their communities on Reddit. And that's a real sense of ownership, I think different from what you might find on other platforms. I want that ownership our users feel to have an opportunity to be matched in real ownership. I think that's exciting. I think it's actually a very Reddit thing to do.

Normally, right before a company goes public on the stock market, there's a moment when certain VIP investors get special access to buy-in early. Here's our colleague Cori Dreebush again. So what usually happens in an IPO is the bankers who are leading the deal and the company all get together and they quote-unquote allocate those shares. They basically decide who gets what. Big mutual funds, big hedge funds, big money managers, some very wealthy individuals, they all can put in orders saying, we want 1,000 shares, we want 100 shares in the IPO. And then they get their allocation

or they find out that allocation that night or the next morning. And they have purchased, essentially, those night or the next morning. And they have purchased essentially those shares at the IPO price. At the moment of an IPO, a stock can sometimes shoot up by 5%, 10%, 20%, 30%. Which if you were a buyer of that initial stock that night before it was listed, that's a huge payday for you. Yes. You always hear of some IPOs that double the first day of trading. And if you bought at the IPO price, you actually see that doubling. Reddit is setting aside up to 8% of its shares for its users and other retail investors before its planned IPO tomorrow. So what is the best case scenario for Reddit by doing this? And what's the worst case scenario?

The best case is the stock goes up. The Reddit executives, including Steve Hoffman, really want to reward the users who have been there since day one and to really make Reddit what it is. So in the best case, the stock goes up and they do get to profit from that along with the company. The worst case scenario in my mind is the stock falls and keeps falling and users feel slighted and insulted and who knows what they could do given they're not shy of boycotts.

One of those users that was invited to invest in the IPO is newer. So Reddit reached out to users in waves, and the lowest threshold was anyone with over 25,000 karma. Karma is how Reddit scores how users engage with the platform. Now, for context, that's one good Reddit post. And suddenly you're in. You are eligible to buy anywhere from one to a thousand shares of Reddit, with each one being priced around $31 to $34.

And all you have to do, apart from being a U.S. resident, is sign a few forms and submit your intent to purchase. Are you going to participate in this? I'm going to buy my full allocation, which, because I'm a Canadian citizen, is zero shares. Ah, so you're not eligible. Unfortunately. Would you buy if you were eligible? I would. I would. And I'm glad that quite a few members

on the moderator team of WallStreetBets, who are American citizens, will be taking part in the IPO. But a lot of WallStreetBets users seem to think that Reddit is a bad investment. And many are saying they plan to short the stock or bet that it will fall. One WallStreet Street Bets user posted,

quote, going to be a hell of a squeeze. It'll make for the talk of the decade, the ultimate troll stock. Why? Why do you think people on Wall Street Bets are so negative about this opportunity to buy at the IPO price? I mean, it's hard to sell a company that's had 18 years of straight losses and say that this is going to become, you know, the next big thing. But so if so many people on WallStreetBets, the forum that you moderate, are negative on Reddit as an investment, why would you, if you could, buy as many shares as you could? Well, my personal thesis is always that any company that people hate but they can't stop using is a company

that's a great investment. We saw with Netflix where they just kept raising prices. And everyone was saying this is the end of Netflix, you know, it's gone down the drain. And what happened their share price absolutely skyrocketed. I think it's going to be the same with Reddit. Reddit for the first time in its 20 year history is finally behaving like an actual adult, an actual business that cares about making money. And while in the past for users, it's been great, you know, just focusing on the core experience and being a lean machine, Reddit was great for individual users, but terrible as a business. And now that's finally changing. What do you think that might do to Reddit's identity, though? It's definitely a scary time. And in fact, we've already seen this over

the past two years where, I mean, we saw the removal of not safe for work subreddits from r slash all. We saw them tinkering with the popular feed. We saw them remove a lot of subreddits that were, I'll call them edgy, that while not really appropriate and, you know, by and large seen as kind of divisive places, they were part of what made Reddit such a unique place that had all these very weird, differing viewpoints. That was the thing that I was so curious about. Because when I heard, oh, Reddit's going to have an IPO, I almost felt like it's like Wikipedia having an IPO. It's like a place that's run and managed to such an extent

by its moderators and users. It's just sort of like this little garden on the internet with all of its bad things and good things. Yeah, I think for a long time that has been, and probably even today, Reddit's core value proposition is its authenticity. You can trust that you're talking to a real human, you are getting real insights. So does this IPO lead to them losing some of that? Yes and no. I mean, they've always needed and had this profit motive. They've always been a business. The question is, will them having quarterly targets to meet and having to stick to a budget and meet

targets, is that going to drive them to make decisions that are worse for users in the long run and risk that authenticity? And I think if it's not done tastefully and thoughtfully, that could be a big risk for Reddit. That's all for today, Wednesday, March 20th. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode by Hannah Miao, Sarah Needleman, and Deepa Sitharaman. Thanks for listening. See you tomorrow.