Reddit Faces Scrutiny from the FTC Over Data-Licensing Business

Reddit Faces Scrutiny from the FTC Over Data-Licensing Business

Reddit, the popular online platform, has recently come under scrutiny from the Federal Trade Commission (FTC) regarding its data-licensing business. According to an updated initial public offering (IPO) prospectus, Reddit received a letter from the FTC on March 14, 2024, informing the company that the FTC’s staff is conducting a non-public inquiry into Reddit’s sale, licensing, or sharing of user-generated content with third parties for training artificial intelligence (AI) models.

While Reddit’s core business model relies heavily on online advertising, the company has been exploring other avenues to generate revenue. One such initiative is its foray into data licensing, which Reddit describes as being in the “early stages.” The company emphasized that its data licensing efforts do not conflict with its values or the rights of its users, known as Redditors. Reddit is planning to go public on the New York Stock Exchange under the ticker symbol “RDDT,” with an IPO valuation that could reach $6.5 billion.

Reddit acknowledged that its data licensing programs may expose the company to evolving regulatory frameworks surrounding data privacy, data protection, misappropriation, and intellectual property laws. The company expects that engaging in data licensing deals could complicate its compliance with these regulations, posing challenges that may require adjustments to its policies and practices.

In response to the FTC’s inquiry, Reddit stated that it is not surprised by the interest expressed by the regulatory body, given the innovative nature of AI technologies and commercial agreements. While Reddit affirmed its belief that it has not engaged in any unfair or deceptive trade practices, it acknowledged the FTC’s intention to request information and documents as part of the ongoing investigation.

Reddit disclosed that it had entered into data-licensing agreements in January, with a cumulative value of $203 million over a period of two to three years. These agreements are projected to generate at least $66.4 million in revenue for Reddit in 2024. Additionally, Reddit announced an extended partnership with Google, granting the tech giant access to its platform data for training AI models and other purposes. Reddit views its growing platform data as a valuable asset for training large language models and monetization opportunities.

The FTC investigation and the broader implications of engaging in data-licensing activities present Reddit with potential challenges. The company noted that interactions with regulators could be protracted and unpredictable, resulting in significant costs, additional investigations, and the need to adjust policies or practices. These regulatory hurdles could divert management resources away from Reddit’s core business activities and negatively affect its financial performance and prospects.

Reddit’s data-licensing business has stirred discontent among some members of the Reddit community, particularly moderators who raised objections during a pricing change affecting third-party developers using Reddit’s API. The price adjustment was intended to ensure fair compensation from tech companies like Google and OpenAI, which utilize Reddit data to enhance their AI models. However, some developers expressed dissatisfaction with the increased costs, leading to operational challenges for their Reddit apps and impacting the moderation of discussions on the platform.

Reddit’s data-licensing endeavors have drawn regulatory attention and community backlash, underscoring the complexity and risks associated with monetizing user-generated content. As Reddit navigates these challenges and responds to regulatory inquiries, the company may need to implement strategic adjustments to safeguard its business interests while maintaining its commitment to user privacy and data protection.

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