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

Reddit will need to spend heavily on content moderation as it may face greater scrutiny as a public company, analysts said, threatening its longstanding policy of relying on an army of volunteers to maintain order on its platform.

The newly listed company warned in its initial public offering (IPO) paperwork that its unique approach to content moderation can sometimes subject it to disruptions like in 2023, when several moderators protested against its decision to charge third-party app developers for access to its data.

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 reported revenue of $804 million in 2023, according to an earlier filing.

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

A spokesperson for Reddit said that alongside moderators, it also had robust internal safety teams, which used a combination of artificial intelligence, machine learning and human review to enforce its content policy, opens new tab.

The policy allows a ban on users and communities for harassment, inciting violence and hateful content.

The company also invests in safety tools for moderators to help automate their tasks, the spokesperson added.

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 US prepares for the presidential election later this year, White said.

"We believe our approach is the most sustainable and scalable moderation model that exists online today. We are continually investing in and iterating on new tools and policies to improve our internal capabilities," the Reddit spokesperson said.

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 5.4% 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.