FTC Probes Reddit’s AI Data-Licensing Practices Ahead of IPO

Reddit disclosed on Friday that it received correspondence from the Federal Trade Commission (FTC) concerning its data-licensing activities linked to the training of artificial intelligence systems.

“In an updated initial public offering prospectus, Reddit revealed that on March 14, 2024, the FTC notified them of a non-public inquiry focusing on their sale, licensing, or sharing of user-generated content with third parties for AI model training,” the company stated.

Reddit filed for an IPO in February and intends to list on the New York Stock Exchange under the ticker symbol “RDDT.”

While Reddit’s primary revenue stream is derived from online advertising, it is exploring additional avenues for monetization, including its early-stage data licensing endeavors, as outlined in the filing.

FTC Probes Reddit's AI Data-Licensing Practices Ahead of IPO
Revenue rose 20% in 2023, with 98% from advertising. (Credits: Revnew)

Reddit assured that these initiatives align with its values and respect the rights of its users and forum moderators, whom they affectionately term “Redditors.”

The company, founded 19 years ago, has proposed selling shares in its IPO at a price range of $31 to $34 per share, which would value the company at nearly $6.5 billion. Reddit aims to go public amid a notably sluggish period for tech IPOs, with no significant venture-backed tech debuts since September 2023.

In the fiscal year ending 2023, Reddit reported a 20% increase in revenue to $804 million, with advertising accounting for approximately 98% of sales, while data licensing contributed the remaining 2%.

Reddit acknowledged the potential regulatory challenges associated with its data-licensing activities, citing evolving data privacy and intellectual property laws. However, an FTC spokesperson declined to comment on the matter.

In January, Reddit entered into several data-licensing agreements with a total contract value of $203 million over two to three years, expecting to recognize at least $66.4 million in revenue from these deals in 2024.

Coinciding with Reddit’s IPO filing, Google announced an expanded collaboration with the platform, granting the tech giant access to data for AI model training and other purposes.

FTC Probes Reddit's AI Data-Licensing Practices Ahead of IPO
Reddit anticipates $66.4M in revenue from data licensing agreements in 2024. (Credits: Design Matic)

Reddit sees its growing platform data as pivotal for training large language models (LLMs) and views it as an additional revenue stream.

Regarding the FTC’s interest, Reddit expressed confidence that its activities were lawful and welcomed discussions with the commission.

However, the company acknowledged the potential for prolonged regulatory proceedings, which could result in significant costs and operational changes, impacting its business, financials, and prospects.

Reddit’s data-licensing practices previously sparked controversy among moderators when the company announced pricing changes affecting third-party developers using its API to build apps.

While Reddit justified the adjustments to ensure fair compensation, some developers found the updates financially burdensome, affecting their ability to maintain Reddit apps used for moderation purposes.

Sajda Parveen
Sajda Parveen
Sajda Praveen is a market expert. She has over 6 years of experience in the field and she shares her expertise with readers. You can reach out to her at [email protected]
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