Reddit reaches for profits through a geek-culture bazaar

SAN FRANCISCO Sat Dec 28, 2013 7:07am EST

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SAN FRANCISCO (Reuters) - Social news hub Reddit snagged an interview with Barack Obama last year. The big get for 2013 was reaching 90 million unique visitors a month, according to the company, on par with the likes of eBay. This season, even Microsoft co-founder and philanthropist Bill Gates joined its Secret Santa gift exchange.

Now, the self-dubbed "Front Page of the Internet" is going for a milestone it has been trying to reach since its founding in 2005: profitability.

After years of fitful experiments with paid subscriptions and display advertising, Reddit, with just 28 employees, has begun pouring resources into building an electronic bazaar.

Company executives say they increasingly believe such a venue is the answer to their long search for reliable revenue, complicated in part by their fans' mistrust of advertising.

If Reddit Gifts, as the burgeoning bazaar is known, brings sustainable profitability, it would mark a turning point for an outfit that has exerted an outsized and sometimes controversial influence on Internet culture yet languished financially.

Reddit estimates over 250,000 items have been purchased over the holiday, mostly as part of the 50 or so mostly geek-oriented Secret Santa gift exchanges - where zombie- or fantasy-themed presents, say, change hands - that users have created.

Although Reddit won't disclose details about how much money it has made from Reddit Gifts or its overall financial performance, it takes a 15 to 20 percent cut of every purchase.

Usually priced between $10 and $25, the goods reflect Reddit's young and geeky user base, from collages of cats in steampunk apparel to coffee mugs branded by Imgur.com, a repository of funny Web pictures, to an entire category dedicated to bacon-related products. More than 250 merchants supply gifts curated and "up-voted" by the community, much as articles and links are elevated on the Reddit site itself.

'JUST GROW THINGS'

The gift exchange made headlines this month after Gates signed up and surprised a Reddit user by sending her a travel book and a stuffed cow, symbol of the charity he donated to in her name.

The company, which is hoping to position itself as a bona fide shopping destination year-round, estimates that only 14 percent of its marketplace revenue comes from the Christmas-season gift exchange programs.

Yet those sales alone could put Reddit firmly in the black, said Dan McComas, the head of Reddit Gifts. He added that the company may choose to reinvest funds in e-commerce customer service and infrastructure.

Chief Executive Yishan Wong, a former Facebook executive, said Reddit was "kind of" breaking even and denied that pressure was mounting on his team to turn a profit.

In 2011, Reddit was spun out as an independently operated subsidiary by corporate parent Conde Nast, an old-line magazine empire best known for publishing Vanity Fair, Vogue and The New Yorker. Industry observers surmised at the time that the move was a step toward eventually selling off a stake to outside investors.

"Our backers are saying, 'Don't worry about making money, just keep money and grow things,'" Wong said in an interview. "But I would like Reddit to be self-sustaining because I think that's a healthy way for a business to run. It means that what you're doing provides real value, and Reddit Gifts is so promising because it can do that."

Wong said he saw potential in Gifts earlier this year and began staffing up the effort to eight people.

Although Wong is giddy about Gifts' impact on its finances, what scale the business could reach remains unclear. Wong said he did not envision Reddit posing a threat to folksy arts and crafts e-tailers like Etsy; Reddit could carve out a space with a geekier sensibility.

"I don't believe in going after someone else's market, but going after a new market of our own could be huge by itself," Wong said.

THE NICHE FACTOR

Facebook struggled for years to develop a marketplace because its users aren't in a shopping mindset when they log on.

The same could be said for Reddit, known for its forums on politics or technology rather than for deals or flash sales, said Krista Garcia, an analyst at eMarketer, a consulting firm. A media company that enters the e-commerce business may also be caught off guard by the complexities of logistics or customer service, she added.

"Reddit and commerce is an odd pairing, but there is more potential there versus Facebook because it's more niche," Garcia said. "I could see them tapping into a much more passionate audience. They need to bring the right products and merchandise that's unusual or unique."

Reddit's place at the vanguard of Internet culture - where jokes and memes gain traction alongside political debates or discussions of breaking news - is also far from assured in a fickle Web arena. Rivals like Digg.com have rapidly declined.

The site's hands-off attitude toward content has drawn criticism, particularly about some loosely moderated forums where, for example, pictures of women being beaten are freely disseminated.

Reddit's reputation also suffered after forum members mistakenly identified a missing Brown University student as a suspect in the 2013 Boston Marathon bombing. The rumor, which was recirculated by mainstream journalists, blazed across Twitter before authorities said they were seeking Tamerlan and Dzhokhar Tsarnaev.

'FAMILY FRIENDLY'

Conde Nast acquired Reddit for a reported $20 million in 2006 but largely left it running independently for five years, as its viewership ballooned fivefold.

ComScore estimates it drew 21.7 million unique desktop visitors in November, up from 8.7 million a year ago. Reddit's own estimate is more than four times that.

The company struggled for years to find a suitable business model because its community identified with an antiestablishment ethos and distrusted heavy advertising, Wong said.

Reddit Gifts was born in 2009 as an independent project created by McComas, a software developer and longtime Reddit user. He was brought on in 2011, and with Wong's blessing has been hiring staff to work out of an $800-a-month apartment in Salt Lake City.

Unlike Reddit's sometimes laissez-faire approach to moderating its forums, Reddit Gifts will be curated to be "family friendly" as it grows, said McComas, who envisioned limiting the number of merchants to give them more individual exposure.

Brian Linss, a former Yahoo technician who lives near Portland, said he has supported himself making TV- and film-inspired artwork since he began selling on Reddit six months ago.

While he was able to make $1,500 to $2,000 during a "great" month on Etsy, Linss said he now makes four times as much in a good month, where his posters about the hit cable series "Breaking Bad" move swiftly.

"Reddit is trying to assemble those merchants, and I think there's a huge gap in the market for it," Linss said. "People that didn't have access to that geek culture before now have an easy portal to things that they're not going to find at their local retailer."

(Editing by Edwin Chan, Martin Howell and Prudence Crowther)

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