Ellen Pao’s Ouster Preserved Reddit’s $4 Billion Valuation

When Breitbart News published “Ellen Pao Out As Reddit CEO, Blames Site’s Users” recently, we received kudos from Reddit users for understanding it was Poa’s actions aimed at limiting users’ free speech in order to make the site more advertiser friendly that caused a user rebellion. But the business press continues to blame users, in articles such as the San Francisco Chronicle’s “Ellen Pao’s Ouster Shows Reddit CEO can’t Function under Mob Rule.”

The truth: by listening to its mob of customers, Reddit’s Board preserved a $4 billion valuation.

The Chronicle warned that “Ellen Pao may be gone, but the only thing the haters really accomplished is to further prove that Reddit has no future.” In the same lecturing mode it added, “Trust me folks, anytime the masses, not a CEO or board of directors, determine important decisions at a for-profit company, it’s not a good sign.”

The silliness of this statement is amazing. Like most American newspaper, the 134 year old Chronicle has lost half its circulation and about two thirds of its revenue over the last decade. Once a dominant national publication, the Chronicle has less than 150,000 daily circulation and is no longer in the top 25 newspapers in the nation.

The Chronicle’s grim performance compares to 10-year-old reddit.com, which now draws 169 million unique monthly visitors. Reddit is ranked as the tenth-most-visited website in the U.S., and rose in the last six months from the 52nd- to 33rd-most-visited on the planet. Reddit’s 8,000 community bulletin boards had 54.9 million posts in 2014. Reddit is valued at $3.79 billion, but it is doubtful the Chronicle could find a buyer at any price.

The biggest difference between the two media sources is that Reddit is a low-cost, community-driven business, mostly operated by volunteers, which obtains its wildly diverse content contributed for free. The Chronicle is a high-fixed-cost, CEO-and-Board-of-Directors-driven business that pays writers for content and uses editors to conform the paper to management’s worldview. Reddit is booming, but the Chronicle is shrinking.

The main reason for Reddit growth is that “Management maintained as close to a pure Free Speech policy as the law allowed, signaling trust in its community,” according to the Harvard Business Review. Reddit also “traditionally has consulted with the community about business decisions, using subreddits as the mechanism for doing so.”

But Reddit’s community-driven trust began eroding after Ellen Pao lost her five-week-long and very salacious sexual discrimination trial in San Francisco against the elite venture capital firm of Kleiner Perkins. Having told the Wall Street Journal she was upset with the constant criticism from Reddit’s user community during the trial, Pao decided to start shutting down popular “subreddits” dedicated to hating and shaming fat people and other issues she judged were hurting advertising revenue.

Pao then courted a rebellion when she summarily fired Victoria Taylor, who had been the “one person in direct, visible, continuous contact with its community.” Taylor was seen by the community as, “One of Us—even, perhaps The Best of Us—who was not being appreciated. The community felt disrespected, insulted, alienated,” according to Harvard Business Review.

When Pao used her CEO power to suspend the alignment between the Reddit business and Reddit community, she should have known that the users would retaliate. Unlike at the Chronicle, which owns its content and can fire uncooperative employees, Reddit volunteer moderators directly retaliated against Pao by suspending 184 of the company’s most popular “Subreddits.”

Reddit at first viewed the problem “through a management lens” and responded to the community unrest is if it was a PR problem. They offered to begin paying Reddit moderators, just like the Chronicle pays editors. But that move turned out to be like pouring gasoline on a forest fire.

When the community rebellion reached the point of creating an existential threat to company’s $4 billion valuation, it was Reddit’s Board of Directors that wisely caved to the user community by ousting Ellen Pao as CEO.

It is sad that the Chronicle disparages Reddit’s 169 million community-driven customers as “the masses” that must be made to conform to CEO and Board of Directors dictates. The Chronicle probably sold a few extra papers following the chaos at Reddit. But by Reddit’s Board of Directors finally bowing to their customers’ demands, it is Reddit that will continue to grow its huge user base and multi-billion dollar valuation.