John Croteau (5:05)

That's right, what does leadership really look like? On the Power of Advice, a new series from Capital Ideas and Capital Group. You'll hear from athletes, entrepreneurs and executives who've led on the field, in the boardroom and in their communities.

Ann Berry (5:17)

It's not about titles, it's about impact. Discover what drives them and the advice they carry forward. That's the power of Advice published by Capital Client Group Inc. Let's talk about Reddit, the website that hosts millions of online forums and sees about 100 million active users a day. Now, shares in the company dropped over 10% last week, and it sort of came out of nowhere. We really had to look to see what the catalyst was. And it turned out that a research report was just published indicating that Chat GPT was citing Reddit's user posts a little bit less frequently in the responses it was providing to the app users. Questions. Now, this raised fears in the market and forced analysts to look more closely to see if Reddit, which has licensing agreements with both Google and OpenAI, might be handing over its data, but possibly becoming invisible in the process. So we're going to dig into this a little bit, but first, John, give us a little bit of background on Reddit.

John Croteau (6:10)

Right, okay, so Reddit was founded in 2005 and IPO'd in March of 2024. And since then, the share price has been up over 340% with a current market cap of $40 billion. And so when we're talking about Reddit And Google and ChatGPT, these are all partnerships that have been happening since 2024, the Google Deals. Google is paying Reddit about $60 million a year to train its AI on the community. And OpenAI is rumored to be paying about 60 to 70 million dollars a year for the ability to train on the community.

Ann Berry (6:47)

Got it. So these two key deals were struck. Google's was struck in March of 2024. OpenAI's followed right in May 2024. So I nodded out on this. I went back to look at the 2024 Annual Report and see what Reddit had to say about how things. And they didn't say a lot, but there was just some language lurking in there which I just wanted to flag because it, it may actually be prescient. So first of all, Reddit said that it really does compete in what we now call the attention economy. It's competing for users eyeballs. And it goes on to say, John, direct quote, we compete against many companies that provide content and communication services to online users, including Google Meta, including Facebook, Instagram threads and WhatsApp, YouTube, Wikipedia. I thought that was interesting. Snap X, Pinterest, TikTok, Roblox Discord and Twitch. It then goes on to say in Reddit's annual report, again, so this is the end of 2024, after they've struck these deals with Google and open AI. The annual report goes on to say, one risk is quote, our competitors may draw users towards their products or services and away from ours. In addition, we face competition from large language models such as those built by Google, Meta, OpenAI and Anthropic. Redditors may choose to find information using LLMs, which in some cases may have been trained using Reddit content instead of visiting Reddit directly. So John, I read this, right, written at the end of last year, I see the stock dropped 10% last week precisely because this data comes out. So I'm going to pull up the data. I've got it in front of me. And there was a search engine tracker, an AI search engine tracker called Prompt Watch, which basically said as of Tuesday last week, Reddit content was cited in just 2% of chat GPT responses, right? Down from about 10% the prior month and down from a peak earlier in September of 14%. So I just want to point out this is a very teeny tiny right, sample size. It was just one period of time, but it was enough to get the alarm bells ringing. And it was almost as though the market said, wait a minute, we need to go, go back to the annual report, see what risk Reddit have flagged and lo and behold, they found it.

John Croteau (9:01)

Right? And that is the big risk for Reddit. They need to be able to continue to grow their community, otherwise there won't be anything to scrape. They knew they need new members having active conversations on there. And the company said that about 50% of its daily users are going to Reddit to be part of the community and the other 50% about are just coming to get a question answered. They're using it as sort of a.

Ann Berry (9:24)

Search engine now on the search engine front. So we and I talked about this in a prior show. One of the concerns that Reddit has had in its deal with Google is Reddit recently has been flexing, right, and saying we're not getting enough money for the deal that we have with Google, which is about $60 million of revenue a year you set up at the top.

John Croteau (9:41)

That's right.

Ann Berry (9:41)

And one of the concerns is that now if you go into Google and you look for, you type, go into the search engine and you put in your question instead of just getting links to the answers, now we're getting an AI summary, right, which sort of obscures some of that source data. It's just not as immediately obvious as it used to be in the good old days of search, before ChatGPT. And the issue now that seems to be flagged with this report is, well, it feels like that on steroids when it comes to ChatGPT, where Reddit potentially has provided answers through the scraping of IT data, but it's totally invisible to the user right now.

John Croteau (10:15)

Right. And also the community members might feel like, why aren't we getting paid?

Ann Berry (10:18)

Right.

John Croteau (10:19)

You know, so that might eventually hurt the community. And what Reddit is trying to do is they're trying to make their site more welcoming, easier to get in, because they want users that log in, that, that engage.

Ann Berry (10:30)

Right.

John Croteau (10:30)

And so they're trying to make it easier to get in. They're also expanding internationally, so they're to have translation so they can get more data from around the world, local, all around the globe. And they're also trying to prevent bots because there's also been talk on Reddit that are these really users having real conversations? Or perhaps they're bots going on and talking to one another, which means that the community loses validation and is also no use to OpenAI.

Ann Berry (10:58)

Right. The authenticity, that sort of realness of human interaction. Well, the reason that this caught our eye wasn't just the fact that a 10% drop in one day for stock is pretty meaningful. When John and I were talking, talking about this, it feels as though this is really getting to the heart almost of an existential question.

John Croteau (11:14)

Yes.

Ann Berry (11:14)

Not only for Reddit, but for another stock that we covered last week, which is Etsy. Etsy recently signed a deal along with Shopify, again with OpenAI, so that if you go into chat GPT and say, I want to buy a photo frame from Etsy, you'll literally get a link to a specific product and can purchase it with pretty much one or two clicks on the spot. And the question that we're raising, and this is, is this going to be a Faustian pact? Right. Have Etsy and Reddit struck deals with ChatGPT? Will Chat GPT or sort of OpenAI, sorry, come in and scrape all the data and get all the learnings it needs to train its models. And if Reddit and Etsy doesn't produce new information fast enough, then they're going to become redundant because everything that they need to provide, which is data and insight into human communications, is going to disappear. So we're going to keep watching this one. It really is. You go, you strike a deal, you get the money in, but does it come back to bite you? Are Reddit and Etsy signing deals that send them into obscurity? We'd love to hear what you think, so let us know. This one's going to keep coming up. We've got media folks trying to sign deals and licensing agreements with OpenAI. We've got this kind of issue with social media. It's just going to get to be a bigger and bigger issue over time. We're going to take a quick break and when we come back, I answer your question about prediction markets. Brew Markets Daily is sponsored by Public, the platform for those who take investing seriously. Public combines a wide range of asset classes with the tools you need to build and manage your wealth, whether it's with stocks, options, bonds or crypto.

John Croteau (12:44)

And if you have any questions about your investments, Public has Alpha, an AI powered research assistant that can help you find the answers you're looking for. In fact, AI is woven into the entire experience of Public, from portfolio insights to earnings call recaps. Public gives you smarter context at every.

Ann Berry (12:57)

Touch point and an uncapped 1% match when you transfer your old investment portfolio over to Public. So get started at public.com brewmarkets that's public.com/brewmarkets Full disclosures on public.com BrewMarkets.

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Ann Berry (13:40)

John, we have a question from the audience.

John Croteau (13:42)

That's right, Greg in Baltimore wrote Ann, I've heard that in prediction markets people are betting on how long the government shutdown will last. What does that mean?

Ann Berry (13:50)

Thank you Greg. Well, this one is timely for lots of different reasons. Yes, we've got the government shutdown happening right now. It's also timely because we're seeing prediction markets get more mainstream. Just in March, brokerage app Robinhood moved into this area and actually just provided an update revealing massive use of the feature. Prediction markets provide event contracts that allow users to place bets on real world outcomes, from Oscar nominations to NFL games to yes, how long the shutdown will last. Now on September 29th, Robinhood CEO Vlad Tenev posted on social media that the platform hosted over 2 billion event contracts in Q3. That was 100% growth from 1 billion contracts in Q2. Well, here's how they work each event a statement like The Fed will cut rates in October or the government shutdown will last 10 days is turned into a tradable contract. The outcome is binary. So if you think about these specific statements, if it's true, you buy a yes contract. If you think it won't be true, that it won't happen, you buy a no contract. Now, the price of these contracts sit between $0.01 and $0.99 and ultimately the price reflects the crowd's collective odds. For example, if yes is trading at $0.70, that implies the market believes there's a 70% chance it will happen. If it turns out to be true, those yes contracts pay out a dollar and if not, they're worthless. Now, prediction markets face big hurdles. Regulators worry these represent just good old fashioned gambling by another name, especially when it comes to political or sports outcomes. And one regulator, the Commodity Futures Trading Commission or the cftc, has clamped down in the past. It's moved along since then, but it does have a history of clamping down and states now are also pushing back. Robinhood's foray is already facing lawsuits in states like Massachusetts where it's fighting attempts to treat its prediction offerings as state regulated gambling. For now, economists, pollsters and even treasury traders do look at prediction markets as a way to measure opinions from highly engaged observers. The theory is that people who put money on the line have thought carefully about the information available with which to craft their opinions, providing insights into sentiment in a more data driven way. Well, I took a quick look to see what some prediction markets indicate about the latest sentiment on the length of this government shutdown. And as of last night, prediction market player Kalshi thought that the shutdown would last almost 21 days, which would tie it with the second longest one in US history on that platform. The odds of the shutdown lasting more than 15 days now at about 64% of lasting more than 20 days now at about 50% odds and the shutdown lasting more than 25 days at about 40% odds doesn't all add up to 100%. So you see the maths of it squarely. Meanwhile, today on prediction market polymarket, the odds of the shutdown lasting 30 or more days has ticked up to 29%. Well, we're going to keep watching to see where the shutdown shakes out and whether the prediction markets really do call it. Stay tuned for more.

John Croteau (16:49)

And if you have a question for Ann, send an email or voice memo to BrewMarketShoworning Broadcom.

Ann Berry (16:55)

Well, it's 4:00pm on the East Coast. There's the bell, the market's closing and we don't have a ticker tape, but we'll throw it over to our human ticker.

John Croteau (17:03)

That's right, the Dow was down about a tenth of a percent. Otherwise, new record highs. The S&P 500 was up 4.10of a percent and the NASDAQ finished up three quarters of a percent. Some market headlines Shares in the company Critical Metals were up over 40% today after a Reuters report that the Trump administration may take a stake in the rare earth miner. And Tesla Stock gained nearly 5% after a teaser video was posted on X over the weekend that hinted that maybe the EV maker may soon unveil a new car, perhaps the affordable model that's been promised for years. And finally, shares in Verizon were down nearly 5% after the company named former PayPal chief executive Dan Schulman as the company's new CEO.

Ann Berry (17:40)

Interesting. We are definitely going to come back, John, to that decline in Verizon share price in response to the new CEO I've been digging into. I'm going to do more homework tonight. Not yet sure whether it's a way of saying we're sad to see the old CEO go or a way of saying we're not super excited about the new one or both. Well, we're going to come back to that after a bit more homework. Well, just a final thought which is this year we have seen the return of M and A came a little bit later in the year than perhaps folks have predicted in January. But we have seen some blockbuster deals. We've seen it in tech. We've seen a mammoth railroad merger. We are seeing retailer tie ups and take privates. So it was finally time for financial services to have its turn. And today it finally came with Fifth Third buying Comerica for just under $11 billion. Now the uniting of the two regional banks will create a top 10 new US bank. And this is pretty exc exciting news because it's been several years since there's been a really large bank acquisition. This one is actually the largest in nearly three years. That's according to S P data. Now it's pretty interesting that it's coming at a time when interest rates are starting to come down and financial services activity in general is picking up. So we have a merger moment due to all of you later this week and this is one where we're going to go through the basics of financial services and what is going on in bank consolidation. That's it for today's Brew Markets Daily.

John Croteau (19:01)

Brew Markets Daily is hosted by Anne Berry and produced by John Croteau, Tarek Abdelatif and Emily Milian. Our technical director is Kelsey Jones and audio assistants by Brittany De Taco. And the president of Morning Brew, Inc. Is Devin Emery.

Ann Berry (19:12)

Wake up tomorrow with the Morning Brew newsletter and tune in to Neil and Toby on Morning Brew daily. We'll see you back here, folks, tomorrow, same time, same place. Limu Emu and Doug.

Jimmy Fallon (19:33)

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Ann Berry (19:48)

Uh, Limu is that guy with the binoculars watching us?

Jimmy Fallon (19:51)

Cut the camera. They see us.

John Croteau (19:52)

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Jimmy Fallon (19:55)

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Liberty. Liberty Savings Fairy Underwritten by Liberty Mutual Insurance Co. And affiliates, M.A.