Reddit may need to ramp up spending on content moderation, analysts say

Reddit will need to spend heavily on content moderation as it prepares for greater scrutiny as a public company, analysts said, threatening its longstanding policy of relying solely on volunteers to undertake the gatekeeping task.

The newly listed company had warned in its initial public offering (IPO) paperwork that it depended on moderators to "engage in good faith", and risked being perceived as condoning "offensive, inappropriate, hostile, or otherwise objectionable content" due to its approach to moderation.

But depending on volunteers is not sustainable, given the regulatory scrutiny that the company will now face, said Julian Klymochko, CEO of alternative investment solutions firm Accelerate Financial Technologies.


"It's like relying on unpaid labor when the company has nearly a billion dollars in revenue," he added. Reddit's revenue for 2023 stood at $804 million, according to an earlier filing.

The company will need to make substantial investments in trust and safety, which could lead to a "dramatic" rise in expenses, he said.

Stamping out offensive content is crucial for social media platforms, which can see an exodus of advertisers keen on preventing ads from appearing next to unsuitable material.

Many advertisers have been wary of Elon Musk's X after it loosened moderation policies.

Josh White, former economist at the Securities and Exchange Commission and assistant professor of finance at Vanderbilt University, also said that banking on free volunteers is Reddit's biggest risk.

The company would need to ramp up spending on anti-misinformation efforts especially as the U.S. prepares for the presidential election later this year, he said.

Reddit did not immediately respond to a Reuters request for comment.

STELLAR DEBUT

Reddit shares notched a 48% gain in their debut on the New York Stock Exchange, getting a warm reception from investors despite the company not having turned an annual profit since its launch in 2005. They were down nearly 3% on Friday.

Trading in the stock will be closely watched over the next few weeks for more clues about investor interest in new share issues following a prolonged freeze in the market, analysts have said.

"Reddit's successful IPO represents a return to pre-pandemic days when investors were happy to lap up shares in loss-making companies if they offered a compelling narrative," said Dan Coatsworth, investment analyst at AJ Bell.

Popular investor Cathie Wood's ARK Invest also bought nearly 10,000 shares of the company on Thursday, an email from the asset manager showed.