Transcript: Wall Street bets on Reddit

This is an audio transcript of the Unhedged podcast episode: ‘Wall Street bets on Reddit’

Ethan Wu
Reddit is home to 73mn of the internet’s most intelligent commenters, and the company is going public.

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One of the biggest US debuts in quite a while, it’s generated a lot of attention. And the question really for Reddit is, is it a good business and can it survive in Meta’s world? This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I’m reporter Ethan Wu here in the New York studio, joined by my boss Robert Armstrong, who despite not being a Reddit user, has just written two articles.

Robert Armstrong
But you are a Redditor. That’s the important thing. I just crunch the numbers. You’re a Reddit guy.

Ethan Wu
Well, I wouldn’t call myself a Reddit guy necessarily, but I have been on in some capacity for the past, I don’t know, decade or so. I joined in middle school to follow like gaming forums.

Robert Armstrong
What’s the last thing you read about on Reddit?

Ethan Wu
There’s a subreddit called Mildly Vandalised that I was looking at recently, which is just like petty acts of vandalism on sites . . . 

Robert Armstrong
Because that was our second choice for the name of this podcast.

Ethan Wu
(Laughter) Mildly Vandalised Markets News. That’s what we like to present. Yeah. So it’s weird, communities like that, like you know, r/mildlyvandalised or whatever might be. That is the product, right, being sold to to advertisers and ultimately to investors.

Robert Armstrong
I think you’ve put your finger on something that is central to whether this is a good business and central to just the future of the site, which is looking at it from the outside, reading the IPO, filing documents, browsing the site a little bit for the first time. Clearly, what is special about this place is the work that the users put in to make it a better place and a more interesting place, not just upvoting and downvoting things, but more importantly, moderating the individual Reddit conversations and so forth. And the overarching question I think Wall Street is asking and users of the site are asking, this becomes a big public business that makes money and that everybody knows how much money it’s making and it’s the C-suite is making all this dough. Are the Redditors cool with that?

Ethan Wu
Yeah, yeah.

Robert Armstrong
And if they’re not, it’s gonna change the business and change the site.

Ethan Wu
Just to take it back a step for people that may not know exactly how Reddit works or haven’t used it before. The basic premise is that it’s a big forum with a lot of subforums called subreddits. People make posts on the subreddits and then can comment on those posts, and both the posts and the comments can be upvoted or downvoted by other users. So it’s a forum with a user-generated rating system on all of the content, which is supposed to mean that, you know, the cream rises to the top, the most popular stuff is more visible. The junk sinks to the bottom, no one ever sees it. And that feature, alongside the fact that you can create these subreddits, these little, you know, microcommunities dedicated to shared interests, has meant a different type of engagement.

Robert Armstrong
And the subcommunities, the subreddits are self-regulating. They have rules . . . 

Ethan Wu
Exactly. This is crucial.

Robert Armstrong
. . . That is stated by, that are stated by a moderator. And that moderator does work to keep that subreddit a kind of positive and useful place.

Ethan Wu
This is crucial. So when you set up a new subreddit, if I want to set up r/unhedged, right, I am then the moderator of r/unhedged and I can decide, OK, what are the rules we’re gonna put in place? How are we going to enforce them? What kind of culture do we wanna promote? Those tools are given to the volunteer moderators who are users — fundamentally, they’re not paid. They can curate a subreddit’s expectations, rules, community, culture. And that is kind of core to the Reddit product. It’s why people wanna go on it.

Robert Armstrong
And so does all of that and the good vibes associated with that, is that able to survive the transformation to a properly profitmaking, publicly traded entity? I think that is a huge question.

Ethan Wu
That’s right. The CEO in the S-1 document, the public filing to take Reddit public, had a very unencouraging quote about his understanding of what and how Reddit works.

Robert Armstrong
OK, so the preface to this quote, which I find unbelievable, is that clearly one of Reddit’s business plans, which we’ll talk about in a little more detail shortly, is Reddit is this incredible repository of people’s thoughts about stuff and text people have generated on every possible topic, which makes it potentially a perfect training dataset for an artificial intelligence company. And so one of the business plans is to sell the data to AI companies in return for fees. That would be a very high-margin business, etc. Anyway, in the founder’s letter at the front of the filing document, Steve Huffman writes the following. And I find this quote more effective if you read it in a robot voice, so I will. (Speaking in a robotic voice) “Reddit is one of the internet’s largest corpuses of authentic and constantly updated human-generated experience. Reddit data constantly grows and regenerates as users converse. As the world becomes increasingly data-driven we offer solutions that are human and experience-focused.”

Ethan Wu
I love human solutions. It’s my favourite solution.

Robert Armstrong
I know. It’s like he wants to alienate the Redditors as badly as he can.

Ethan Wu
Is Steve Huffman an artificial intelligence already? Unclear.

Robert Armstrong
(Laughter) Exactly. He is the Borg.

Ethan Wu
(Laughter) So and this gets to . . . There is a serious point here which is, does the CEO of Reddit understand what makes Reddit tick? So importantly, Reddit is not profitmaking. It is a lossmaking company. In the push to greater profitability and monetisation, whether it’s through AI-based strategies or from trying to squeeze more money out of users themselves, do you end up corrupting what makes Reddit work, which is the sense of kind of microcommunities that are self-policing, self-regulating, where there’s not much top down, it’s very bottom up.

Robert Armstrong
Now, one thing that is encouraging on this front, if you care about Reddit as a business and as an investor, one thing that’s encouraging is we know that once a social network reaches a certain scale, it’s extremely hard to screw it up. And the reason we know this is because Elon Musk bought Twitter and tried, right? Everyone agrees that Twitter has gotten noticeably worse — less relevant, less powerful, less nice since he bought it. But everyone is still there. I’m still there despite this, and I tried to switch to some of the alternatives. But once you’ve built a community at a certain scale, the community itself is like this irreplaceable resource. It’s just too hard to build again. So it may be even if — and what’s the word everyone is using now? “Enshittification”? Whose word is that? 

Ethan Wu
That’s Cory Doctorow.

Robert Armstrong
Cory Doctorow’s term is when a social network or internet platform sort of rots on the vine. His word for that is enshittification.

Ethan Wu
When you reach critical mass, you have leverage because network effects to make the user experience a little bit worse . . . 

Robert Armstrong
But more profitable.

Ethan Wu
But more profitable for you. And people can’t leave because they’re already bought in.

Robert Armstrong
So it could be that Reddit has reached that point. I don’t know. Every one of these things is gonna be different but that’s one point in favour.

Ethan Wu
But it’s worth making a comparison to the kind of broader social media landscape with Reddit. So Reddit’s unprofitable. It’s going to have an uphill battle to try to develop new business models or cultivate their older ones to reach profitability. And there’s a big outlier in terms of social media profitability.

Robert Armstrong
So the outlier, of course, is Meta. Meta, which came first, grew to massive, massive scale first and developed really good technology for selling ads against social media first. It is like the most profitable, one of the three or four most profitable companies ever. I can’t even remember the revenue number, but it’s something in the . . . 

Ethan Wu
What is the compound growth rate?

Robert Armstrong
The compound growth rate like since 2009 of like free cash flow is like 50 per cent.

Ethan Wu
Yeah. It’s ridiculous.

Robert Armstrong
And like to do that every year for 15 years is like you can’t even conceive what that is. And so it sort of blows everything off the map. And it now towers over the social media business. No other business can compare to it in size or profitability.

Ethan Wu
And it’s not just Reddit. It’s Twitter, it’s Snapchat, it’s Pinterest.

Robert Armstrong
But all of those ones that you just mentioned are sort of snatching for the little scraps of advertising money that fall out of Meta’s mouth as it gobbles it all down. One industry analyst described to me yesterday as “Advertisers spend money on Twitter or Pinterest, Snap when something is left over from their budget for spending on Meta”. Now, that said, these other businesses — Pinterest, Snap, definitely Twitter — these have grown to be relatively big businesses. We’re talking about multibillion-dollar revenue lines for these businesses. But they are very different from Meta. And the question is, you know, they’ve followed a certain trajectory. Will Reddit follow the trajectory they’ve followed? Can it maybe get bigger? Can it get closer to or are the profit dynamics different? But those are the kind of . . . Is, you know, is it a Pinterest, is it a Snap, or is it something between those and the giant Meta?

Ethan Wu
Yeah. An interesting comparison to bring in is TikTok, which has actually given Meta via Instagram a run for its money. In terms of basically, TikTok perfected the short-form video format, the kind of highly addictive, high-touch, high-speed, you know, short videos that really, really drive engagement. You could hear it in the Meta earnings call, them seeming a little nervous about TikTok, getting a lot of questions from analysts. And they’ve had to really invest in their short-term video capacities.

Robert Armstrong
And you can be sure, or at least I’m pretty sure, that the government is not gonna make the same mistake twice and let Meta buy that thing, even if it’s for sale. Like they made that mistake with Instagram. That did massive damage to the competitiveness of the social media space. You can’t just buy your rivals at this point in this business.

Ethan Wu
It’s true. But what TikTok was able to do is basically create a new dimension of competition. Here’s this new video format that like people hadn’t really seen before. And Facebook, you have to come and compete with us on our terrain.

Robert Armstrong
Yes. So has Reddit done that?

Ethan Wu
Has Reddit done that, right? And so it’s an interesting question. Reddit in many ways precedes Meta. It’s part of the kind of OG old internet forums. Obviously, there was some form of Facebook around, but it was at like Harvard or whatever at the time. And you could argue that Meta via Facebook has invented a lot of the capacities that Reddit has. You know, the groups system on Facebook is a really significant feature now that they’ve put a lot of development time into. It’s not quite the same as subreddits. Like I prefer going on subreddits than on Facebook groups. And I think there’s a culture to Reddit that’s unique, but I think we have to say that it’s not like Reddit is in a category of its own the way that TikTok in many ways still is. TikTok content gets reposted everywhere else on the internet, right? It’s kind of the driving engine of where stuff is happening.

Robert Armstrong
Yes. One issue is, to put it most broadly and most baldly in terms of money, can a medium-sized social media company make money? What is the economics of being a mid-sized player? Let me put it this way. So right now, I’m just checking my numbers, revenue at Reddit is about $800mn. I think Pinterest is in and Snap are in like the $3bn-$4bn range. And the thing is, if you look at really genuine cash earnings, I don’t think Snap and Pinterest and probably not Twitter are really cash profitable. The reason I say this is because to the degree they show cash profits, it’s because they have massive stock compensation plans. So they’re paying their employees in IOUs. And if you treat their stock comp plans as a real expense, they are burning cash still at a scale of $4bn of revenue. So what size in terms of revenue does Reddit have to get to from $800mn now in order to be a real cash profitable business? And I don’t know the answer to that question. Part of the answer is that AI question: how much can they just straight up sell that data for?

Ethan Wu
Yeah, yeah, yeah. In terms of pure finance, it’s hard to see how Reddit, you know, gets to Meta-level profitability just via its traditional methods.

Robert Armstrong
Impossible. I’d say it’s impossible.

Ethan Wu
Yeah, it would need to create a new business line. And which is why you’re seeing in the IPO documents they mentioned AI like 50 or 60 times, right? They really want to hammer home . . . 

Robert Armstrong
And it’s a plausible story.

Ethan Wu
Sure, it is. It’s just, how do you estimate the magnitude of that business, right?

Robert Armstrong
Yes. Look, this company is not gonna be as big as Meta. It’s not gonna have as high margins as Meta. It’s not gonna have as many users as Meta. But even if the data sale for AI business turns out to be good, if this thing wants to arrive at profitability, it has to get bigger. Period. The number of users has to get a lot larger. Seventy-plus million daily active users is not gonna get them to profitability. So the question is, this kind of do it yourself, community-based product, can it get bigger? That’s the question I would ask of Reddit investors. What is the story about how Reddit can bust out past its traditional roots and become something much larger?

Ethan Wu
Yeah. You gotta at least get over the Snap bar.

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That’s a pretty low bar. (Robert laughs) We’re not there yet. All right, Rob, we’ll be back in a moment with Long/Short.

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Welcome back. This is Long/Short, that part of the show where we go long a thing we love, short a thing we hate. Rob, you long or short something?

Robert Armstrong
I’m gonna follow my controversial long cocoa position.

Ethan Wu
Big Mo.

Robert Armstrong
Big Mo. I said don’t mess with momentum. Here is another example: I am gonna be long DJT, Trump Media and Technology Group Corp. You had a great piece about this yesterday that pointed out that at 60, 70 bucks, this stock makes no sense whatsoever. You have to assume the most crazy things to get to a $65 share price. But if we’ve learned anything, it’s that a stupid thing can get stupider. So I am long DJT.

Ethan Wu
Yes, once you’ve departed the realm of fundamentals, you can go anywhere.

Robert Armstrong
Yeah. You just free float. Anything can happen.

Ethan Wu
But you’ve escaped velocity. Yeah. Well, Rob, I’m short illustrations of Samuel Bankman-Fried. People may know he’s being sentenced today. By the time this podcast goes out, he may already have been sentenced. But in all the coverage of the SBF trial, there have been like various court sketches and attempts to illustrate Sam. They’ve all been kind of weird, in my opinion. And there was one yesterday in Bloomberg Businessweek that was like truly over the top and ridiculous. They depicted Sam as this kind of like black and red anime protagonist in the shadows. Like an absolutely ridiculous drawing. Let’s just show pictures of him. We don’t need to go crazy with it, guys. Come on.

Robert Armstrong
Yeah, but the lesson here, of course, Ethan, is that if you wanna be a major figure in finance, especially in the speculative end of finance, you need a look. Say what you will about Sam Bankman-Fried and how he’s come low. But the guy had a look and it really worked for him for a while there. He’s a guy people just wanna illustrate.

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Ethan Wu
It’s true. The hair and the shorts.

All right, Rob, thanks for being here. We’ll have you back soon. And listeners, we’re back in your feed on Tuesday with another episode of Unhedged. Catch you then.

Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta Cohn, and Natalie Sadler. FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com/unhedgedoffer. I’m Ethan Wu. Thanks for listening.

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