THE STATE OF REDDIT: Did you know that Reddit is the 3rd most visited
website in the US? In February of 2024, they pulled in 4.47 billion visits which was more than
Amazon and Facebook and only beaten out by Google and YouTube. Zooming out to the entire world,
Reddit is still one of the top 10 most visited sites coming in at number 8 just under Instagram,
and last year, Instagram pulled in a solid $60 billion worth of revenue. With that in mind,
how much revenue do you think Reddit pulled in? Maybe $30 billion or $40 billion? Well,
Reddit didn’t even pull in $1 billion. In fact, they only generated $810 million the
entire year. This is especially concerning when you consider that they boast 850 million monthly
active users. In other words, Reddit does not even make $1 per user per year. And that’s despite the
average Reddit session being longer than the average Instagram session. And Reddit isn’t
some sort of new social media startup like BeReal either. Reddit has been around for
nearly 20 years now. And if you’re still not convinced that Reddit has completely dropped
the ball when it comes to monetization, just think about this. You know Craigslist right?
The online marketplace that looks like it’s stuck in the 2000s? Well, that’s because the Craigslist
team doesn’t even care to optimize or monetize. They want the platform to be community-driven
and just looking to generate enough money to sustain themselves. And the funny thing is
that even Craigslist has had years with higher revenue than Reddit despite having less than
a third of Reddit’s user count. For nearly decades, private investors have put up with
these lackluster financial metrics simply because Reddit’s user base was too large to ditch. But,
just last month, Reddit became a public company with a roaring IPO, and now the
pressure is on to monetize Reddit. But, what even happened? Why was Reddit not able to successfully
monetize all these years, and do they have a chance of changing that story moving forward?
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companies pay you, check out our bond investing app Silo in the description below. But anyway,
to understand why Reddit has had such a hard time generating revenue, we have to take a look back at
how they even grew their user base in the first place. The story of Reddit takes us back to a
man named Steve Huffman. Steve was part of one of the first generations to grow up with computers.
In fact, Steve had been learning to code since he was just 8 years old and he naturally went
on to study computer science in college as well. During his senior year spring break,
Steve decided to attend a local lecture delivered by an entrepreneur named Paul Graham and this
completely changed the trajectory of Steve’s life. If you aren’t familiar with Paul Graham,
he’s one of the co-founders of Y Combinator, the startup incubator. Steve would get a chance
to talk to Paul after the lecture, and Paul would invite Steve to apply to their brand-new
incubator. Steve’s first idea wasn’t to create Reddit though. His first idea was actually to
create something eerily similar to modern food delivery. His idea was to create a way for people
to order food through SMS messaging. Let’s just say the world wasn’t ready for this idea yet,
so Steve would be forced to pivot which is when he came up with the idea for Reddit. Reddit would
be part of Y Combinator’s first class, and with Y Combinator money, Steve would the get site up
and running with the help of one of his college roommates: Alexis Ohanian. Reddit would officially
go live on June 23, 2005, but the website didn’t just immediately blow up. In fact, the
site would struggle with underwhelming traffic. Embarrassed by how little traffic the website got,
Steve would leverage the classic Silicon Valley strategy of fake it till you make it. Steve would
go ahead and create hundreds of fake users and make a bunch of fake posts to make it seem like
the website was actually active. And that brings us to the first reason that Reddit has had such a
tough time making money which is that Silicon Valley mantras like fake it till you make it
and growth over everything else have been engraved into Reddit’s blood. In other words, Reddit simply
didn’t care about making money, like at all. As far as they were concerned, as long as they had
enough funding to sustain the company, the only thing they cared about was growth. Technically,
they started selling ads pretty early on in 2006, but they didn’t build out this infrastructure
till 2018, 13 years after the company was founded. It was only then that they started
building out ad servers, mobile ads, comprehensive bidding, interest-based targeting, retargeting,
and serious conversion tracking. I mean, these are all basic attributes of any advertising platform
and Reddit didn’t build this out till the late 2010s. No wonder, their revenue was so lackluster,
but anyway, using the fake accounts, they would make these posts about tech-savvy topics that
they thought would attract the right users. This strategy was effective in attracting users to the
platform, but were they actually the right users? Well, that’s a lot more questionable.
UNFAVORABLE DEMOGRAPHICS: Over the years, we’ve talked
about social media platforms having suboptimal demographics, but Reddit’s demographics are
suboptimal in a completely different way. With most other platforms, the main issue with the
user base is that they’re too young or don’t make much money which makes it hard to monetize. But,
with Reddit, it’s a completely different issue: their users hate the consumer economy.
For example, what do you think when you see a picture like this? Do you think: Oh wow,
I wonder how he was able to afford that car. I wish I had one as well. Or do you think:
Oh, what an ostentatious display of wealth and gluttony that achieves no purpose. If
you thought the former, then you’re probably an Instagram user. If you thought the latter,
then you’re probably a Reddit user. In fact, I would argue that this is one of the main factors
that made Reddit popular in the first place. A lot of people felt that mainstream platforms like
YouTube, Instagram, Facebook, and more recently TikTok are overly consumption-oriented. Every post
you see on Instagram is to some degree a show of wealth and status. Whether it’s a post showing off
designer clothing or supercars or a luxury home or a first-class vacation or a destination wedding,
you get the idea. It’s the same thing with YouTube. If you’re a kid nowadays, you’re
not watching Spongebob, you’re watching MrBeast giveaway a million dollars every week. Obviously,
a lot of people are fans of this sort of content. That’s why Instagram and YouTube have billions of
users, but a lot of people aren’t fans either, and those are exactly the people who gathered
on Reddit. A sort of anarchist sort of community. This isn’t to say that all Reddit users think this
way but much of Reddit’s core user base does. This of course means that the prevalence of adblockers
amongst Reddit users is extremely high, but even if these guys were shown ads, they’re not the
type of person to be swayed to buy something on a whim anyway, making it extremely difficult to
monetize. If this aversion to advertising and consumption wasn’t bad enough, Reddit also has
to fight against other monetization challenges as well. For example, much of Reddit is NSFW or Not
Safe For Work content. In fact, Reddit was the platform that really popularized this acronym
in the first place. Now, I’m not sure how accurate this statistic is but according to a Reddit post,
22% of subreddits with over 100,000 users are NSFW. Aka, advertisers don’t want to get anywhere
near 22% of Reddit and the other 78% isn’t much better due to Reddit’s format. With YouTube,
you can easily show video ads, arguably the most effective type of ad. With Instagram and TikTok,
you can do sponsored posts. And with podcasts, you can directly speak to engaged listeners,
but what the hell do you do with Reddit? You’re more or less just limited to display ads like this
which are notoriously ineffective for advertisers. So, essentially, you have a massive community that
isn’t big consumers to begin with. And on top of that, 22% of the platform isn’t even
advertiser-friendly. And the other 78%? Well, you can’t effectively advertise to these people
anyway and you’re stuck with bottom-of-the-barrel display ads which brings us to where we are today.
A NEW STRATEGY: As you can see, Reddit has always
struggled with monetization partially because of the mindset of the founders and executives who
prioritized growth over everything, and partially because of the mindset of users who don’t care
to consume. Despite these challenges, Reddit has doubled down on monetization since the late 2010s,
largely because you can’t just indefinitely run a money pit. Eventually, investors do want to see
returns. The good news for Reddit is that this monetization push has been quite successful.
They were able to scale revenue from just $80 million in 2018 to $810 million in 2023. So,
over 10X in just 5 years, but a good amount of that growth was thanks to Reddit’s user
base growing. Since 2018, Reddit’s user base has tripled but not much has happened since
the beginning of 2022. It seems that Reddit is starting to reach market saturation, and as such,
revenue growth between 2022 and 2023 was also much lower than in previous years. This isn’t to say
that Reddit can’t continue growing their revenue by shoving in more ads and becoming stricter with
AdBlock like YouTube did. But, I have a tough time seeing Reddit being able to scale this model past
$10 billion in annual revenue, and that’s being generous. Obviously, not a bad amount but still
a lot less than their peers, but maybe there’s another way. Just because the advertising model
doesn't mesh well with Reddit doesn’t mean that there’s no way to monetize their massive user
base which brings us to their new partnership with Google. In late February, Google announced
that they would be partnering with Google, not to run ads but to train their AI models. And if you
think about it, that actually makes a lot of sense. What is Reddit’s biggest asset? Well,
since it’s anonymous and its users don’t care that much about social status or image anyway, people
post and comment about whatever they want quite freely. You won’t find that on a platform like
Instagram where the comments are even faker than the posts themselves. This makes Reddit one of
the few treasure troves on the internet where we see pure unfiltered thoughts. That’s what attracts
many users to the platform in the first place, and it just so happens that that’s extremely
valuable for training AI. I mean, where else can you get this sort of depth and breadth in terms
of topics and discussions? Not to mention, on a public forum. Google has spotted this opportunity
and that’s why they’ve agreed to pay $60 million to get access to Reddit’s data APIs. Ironically,
that’s almost 10% of Reddit’s entire 2023 revenue, but in the grand scheme of things, it’s not all
that much money. Who’s to say that it stops there though? In 2021, Google paid Apple $26 billion to
be the default search engine on their devices, but I’m sure it was nowhere near that amount when they
initially struck the deal. If Reddit’s data is truly helpful for Google in taking on the likes
of ChatGPT, it’s possible that this deal will grow into something much larger. In fact, maybe other
AI companies will also start approaching Reddit at which point Google might have to pay even more to
have exclusive rights to the data. That’s just one theory though. The bottom line is that advertising
doesn't work all that well on Reddit and that’s why the company is barely generating any revenue
despite being one of the most popular websites on the planet. But, just because the advertising
model doesn’t work doesn’t mean that there isn’t another way to monetize. Only time will tell if
one of these other avenues is successful though and in the meantime, Reddit will remain the worst
monetization failure in social media history. If you're interested in deeper dives, interviews with
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