Since its founding in 2005 by Steve Huffman and Alexis Ohanian, Reddit has grown into the unquestioned king of socially aggregated news and content. Yet, despite a 2014 $50 million round of venture funding that reportedly valued the company at $500 million, it is an open secret that the “front page of the internet” struggles to earn a profit after 10 years of existence.
At the surface, Reddit’s business model appears very similar to that of Facebook—create a popular web destination with compelling content and sell ads to all those eyeballs. Only one of these companies has a market capitalization of $300bn, however. A closer examination of Reddit’s operating model reveals that it appears geared far more towards maximizing the experience (and trying not to annoy) its core userbase, rather than on maximizing revenues.
How it Works
Reddit is an online content aggregator and the way it works is pretty simple. A user submits a link to somewhere else on the internet to any one of 10,000+ subreddits (subdivisions of reddit devoted to interests ranging from politics and food to topics as specific as The Walking Dead or the Python programming language). Registered users then can upvote or downvote these links, and the most popular ones rise to the top of the list for others to see. Users can also make comments, and extensive discussions organically arise. Community-appointed moderators monitor each subreddit to ensure conversations remain on topic and free of rule violations.
What results is a thriving ecosystem of miniature communities to which users subscribe, customizing their individual Reddit experience to ensure that they see only the top stories from their favorite subreddits.
Reddit seeks to profit from its addictive and endless treadmill of content with relatively standard advertising via its online self-serve platform, or by speaking to a sales representative for monthly budgets larger than $30,000. Advertisers can create Sponsored Links to their website formatted as a highlighted piece of Reddit content with “Sponsored Link” written unobtrusively in the corner. There is also extremely limited graphical inventory available on the sidebar of the otherwise very text-heavy website. Ads can be purchased on the front page, or they can be subreddit-specific. Location targeting is available. Ads are sold via flat CPM that are periodically repriced based on segment popularity – there is no real time bidding auction. Graphical ads are susceptible to ad-blocking browser extensions
Reddit has done a fair bit of experimentation on mobile advertising since acquiring the independently developed Reddit-browsing app Alien Blue in October of 2014. At present, mobile ads appear disguised as stories (similar to only on non-upgraded versions of the app (users can buy the Pro version for a one-time $2 fee). Such a low ad-free price implies an extremely bearish view on the predicted lifetime value of mobile advertising on a per user basis.
There is another smaller revenue stream, Reddit Gold, to which users can subscribe for $4/month in return for special members-only features. This has proven a tough sell, as popular browser extensions such as Reddit Enhancement Suite provide for free many of the low-hanging fruit features that might otherwise be monetized. It’s currently positioned as a way to “help keep servers running” and can be gifted to other users on the platform to reward them for particularly insightful or funny comments.
Now, let’s talk some statistics on traffic. Reddit attracted 199 million uniques last month, an impressive number that places it 33rd on Alexa’s list of most trafficked websites on the internet, ranked higher than such juggernauts as Netflix, WordPress, and Apple. (CITE) However, only 3.3 million of those MAU were logged-in Reddit users, representing less than 2% of its total MAU. To put that into perspective, in Facebook’s most recent quarter, they reported 1.5 billion MAU—all of them logged-in members.
Now why is this important? Because of the killer value proposition of online advertising—with great user data comes great targeting. And with great targeting comes great CPMs. While a logged-in Reddit user produces a treasure trove of information that advertisers would love nothing more than to use in their targeting, when only 3.3 million of Reddit’s MAU log in, that opportunity becomes much smaller.
The Targeting Opportunity
If Reddit’s registered users made up the entirety of its monthly traffic, the possibilities for the advertising business would be enormous. The combination of seeing the exact subreddits members have subscribed to, as well as the content of their comments and messages in order to guess at their interests (a la Gmail) would represent a massive targeting opportunity. Facebook’s advertising business has become as lucrative as it has as a result of the success and flexibility of its Power Editor—its advertising tool that allows extremely granular targeting. Reddit can’t compete with that, and it doesn’t make sense to build that functionality until the active userbase is large enough to justify the investment.
Looking Ahead: Can It Be Fixed?
Reddit currently has a user education problem—how can they convince the casual 98% of its traffic that their experience would be that much better if they invested the time to customize their subreddits and begin commenting on links? It’s the single largest problem that leadership needs to address if they want to take full advantage of their platform.
Another option would be a site redesign to open up new advertising real estate, although this is a far riskier proposition than it might initially seem to an outsider. Facebook had the benefit of incredibly sticky network effects that allowed it to push through its historical redesigns despite initial resistance from its members. Digg, a precursor to Reddit, was not as lucky. When they rolled out a major site redesign in 2010 that centralized power around a small number of power users, the larger userbase deserted en masse for Reddit. And with the aggregator formula relatively simple to reproduce, any major design shakeups after 10 years could lead to the rapid decline of Reddit, rendering this option risky.
Sadly, as a private company, scant data is available on Reddit’s ad revenue and profit. But with little change in observable monetization behavior since the reported $500 million valuation in 2014, it is safe to say that Reddit has yet to turn its attention to this problem. And that’s fine for users – so long as Reddit breaks even, they’ll remain happy. However, from the perspective of its investors, the clock may be ticking for Reddit to begin monetizing its assets more efficiently to take full advantage of all the potential the platform has to offer.