Today we are talking about Reddit, the so-called ‘front page of the internet,’ who has decided to pull the rug on developers by charging an arm and a leg for API access.
In case you were unaware, Reddit is the 18th most popular website worldwide. It’s a place where communities flourish like mushrooms after rain and where memes are a form of currency. It’s place that boasts a virtual smorgasbord of subreddits, from obvious subreddits like r/funny to the eloquently named r/RealBeesFakeTopHats, where one can indulge in pictures of bees wearing top hats. Or ones like r/prisonwallet where you get tips on sneaking contraband into prison using your rectum.
Now, on the 1st of July, Reddit is unleashing its wrath by charging developers 24 cents per 1000 API calls. Apollo, the knight in shining armor that enhances your Reddit experience, would have to fork out around $20 million a year to keep up.
Now, a band of rebels – including subreddits like r/news and r/gaming – have decided to take a stand. They’ve gone dark in protest. Like a virtual “Hunger Games” except only for 48 hours, and in many cases, it doesn’t apply if you already joined the subreddit.
Users of these apps are rightfully freaking out. Begging the obvious question, if you’re Reddit, and you’re so concerned about third party apps, why don’t you just make your platform better?
Well, the answer lies in feeding ads to users. They get less ads on these other platforms.
We’ve all seen this movie before. It’s not the first time we have seen a social media platform chase dollar signs over users. In fact, Twitter starting pulling the same stunt on API users after Elon’s takeover.
But the most obvious example of social media platforms selling out is Facebook. Facebook was a regular part of peoples lives in 2010. Around that time, they went public and tried to monetize everything, but they ended up driving away users after those users found their timelines filled with ads. Today, as per most people I talk to, the only reason to use Facebook is for their marketplace.
Yes, Meta still makes money hand over fist, because they have instragam, and whatsapp, and the top data friendly advertising platform in the world. But they clearly cashed in their user experience for dollar signs.
Okay, let’s get back to the protest.
Sadly, this revolt will likely not have the impact users want. Unless they get a lot more serious about it. It sucks, and it’s why many people want a more decentralized internet, where these platforms don’t hold the keys to your social media footprint.
But, it’s how tech works. Apollo is learning this the hard way. You build your app in someone elses kingdom, well then you are just kind of a renter waiting for the landlord to jack the price.
I mean, Apple can just kick you off its App Store like an overzealous bouncer. Google can steal your traffic faster than you can say SEO, and YouTube and Instagram can cancel you for sneezing the wrong way, after you spent years building a following on their platforms.
But were not talking about them, today were talking all things reddit, from it’s creation, to controversies, to the recent bruh-ha-ha.
Let’s dive in.
What is Reddit?
It’s 2005, and two college roommates, Steve Huffman and Alex Ohanian, who met eachother on move in day freshmen year form a friendship that will change the internet as we know it.
They kindled their friendship over the excitement of video games and the internet. But then Alex walked out of an LSAT exam, making the decision to drop out of school and give up the dream of being a lawyer. Next, Steve and Alex drive to Boston to sit in on a lecture by none other than Paul Graham, who is talking about startups. They then mustard up the courage to offer to buy Paul a drink so they could pitch him their own idea, this, my friends, is the accidental Big Bang that led to the creation of the galaxy we call Reddit.
A month later, Paul created YCombinator, a very early stage type of venture capital firm, and emailed the two suggesting that they apply to the program, which would give them $6,000 per founder to work on their idea in Boston for 3 months.
Naturally, the two were ecstatic. They pitched Paul over a trial pitch meeting during drinks for their company called My Mobile Menu, which was an app similar to DoorDash or UberEats and he loved it, so they thought they were a shoe in.
But then, after their official pitch to YCombinator, they recieved the notice that My Mobile Menu would not get the funding, and off they went, back to Virginia with heavy hearts and wondering what went wrong between the private pitch during drinks and the final decision.
But hope was not all lost, when during the train ride back, they received a call from Paul, who tells them that the committee loved them but not the idea, so if they could come up with something else that doesn’t include a phone app they would reconsider them for the program. Paul then told them, “I want you to spend the next 3 months working on a browser application that makes your morning routine better.”
So, Huffman and Ohanian went full Frankenstein and gave birth to Reddit, which is a clever play on the sentence “I Read It.” And just like that, they were accepted into Y Combinator’s first class.
The beginning of monetization
Now let’s fast forward a few years.
Reddit is like the popular kid in school – they are now one of the most visited websites in the U.S, with over 52 million monthly users. And Steve and Alex come to the realization, “Hey, we’re a top-ranking site! Let’s swim in the pool of capitalism!
From day one, there were two challenges for Reddit to monetize what they had built: one was that many people used third party platforms to access Reddit and the other being that part of Reddit’s charm is linking out to other platforms. When you’re trying to monetize your users attention, linking out gets users away from your platform – and your platform is where you can make money off them.
With this in mind, the company started a series of revenue generating moves. In 2009, Reddit started offering advertising, which brought in some money, but wasn’t a huge financial windfall for Reddit.
A year later, they introduced Reddit Gold, a subscription service that makes you feel like a pirate lord with exclusive lounges and no pesky ads. Today, it’s called Reddit Premium, and has less than 400,000 paying users.
Next, Reddit tried to cash in on all the crypto hype with their own verison of NFTs, calling them “Reddit Collectible Avatars.” The move was somewhat ironic at the time, given how Reddit communities had a general distaste for NFT’s. However, this didn’t stop the initial 40,000 collectible avatars from selling out quickly. Fast forward to today, and there are more than 5.6 million users holding more than 7.75 million collectable avatars.
And also – Reddit now allows subreddits to create their own merchandise, like t-shirts and stickers.
But in the face of a declining valuation from the likes of investors like Fidelity, Reddit decided to hop on the Elon Musk/Twitter train and make some radical changes to their API.
The API, which developers used to get for free, now has a price tag so high that the guy behind Apollo, an unofficial Reddit app, reckons he may have to shut down. The math is simple, at $0.24 per 1000 API calls, and an average of 7 billion calls per month, it works out to an annual API fee of nearly $20 million for Apollo alone.
This change has caused so much havoc that many of that many subreddits started having blackouts to protest these changes.
The revolt itself, which took place earlier this week, was substantial in size. In terms of numbers, over 5,307 subreddits participated, which resulted in over 23,182 moderators being a part of the movement, and a collective userbase/subcount of over 2 billion users subjected to the blackouts.
The mass amount of subreddits going dark also resulted in significant issues for Reddit as a whole, who wasn’t used to so many subforums changing their privacy settings in a short period of time.
Despite the revolt, Reddit isn’t changing – its CEO told employees earlier this week that the blackout “will pass.” As a result, a number of third party apps, which pride themselves on providing better moderating or accessibility features than the current official app from the platform, have indicated that they will be closing down in the near term. Major apps like Apollo and RIF have indicated that they will no longer operate once the API changes are put into place.
So why is Reddit so concentrated on making more money? Simply put, they want to go public.
The problem is the users are the ones taking the hit, so the founders and investors can get some liquidity.
Now lets go back to the early days of Reddit.
In the beginning, Reddit was like a toddler at a dinner party – desperately trying to be noticed. Huffman and Ohanian were the puppet masters, juggling numerous fake accounts to post links.
By 2010, Reddit’s bandwidth and pageviews were tripling like rabbits in springtime. The creation of Reddit Gold and advertising helped the company to cover development fees as Reddit grew to 1 billion views per month. And then a year later, they saw monthly page views double to 2 billion per month.
But part of what was happening was the NSFW subreddit, that rowdy cousin who you hesitate to invite to family gatherings, ended up being the life of the party. This cheeky subreddit staked its claim as the most popular kid on Reddit in early 2006.
As Reddit grew, so did its valuation. By 2014 Reddit raked in $50 million in a raise that valued the company at a cool half a billion. Even Snoop Dogg wanted in on the action.
Then in the middle of the pandemic, Reddit raised over a billion dollars to bring their valuation to $10 billion. Shortly after the raise, rumors started swirling, and Reddit filed a confidential S-1 with the SEC, suggesting that management was looking to take Reddit public at a whopping $15 billion dollar valuation. Nearly 5x’ing their price tag in three years.
But then, weeks turned into months, and months turned into years and Reddit did not go ahead with going public, which now looks like a massive missed opportunity in hindsight as Fidelity chopped its valuation by 41%.
The past controversies
For what it’s worth, this latest API revolt isn’t exactly the first controversy to hit the social media platform.
In 2013, Reddit users decided they were all detective Sherlock Holmes during the Boston Marathon bombing. Armed with magnifying glasses and wild speculations, Redditors were all over the case. But alas, they were more like Inspector Clouseau from Pink Panther. They misidentified innocent folks as suspects, and one of those was a man named Sunil Tripathi. His story tragically ended in suicide.
Around the same time, Reddit experienced a chaotic frenzy in a subreddit named r/TheFappening. It began when explicit photos of celebrities Kate Upton and Jennifer Lawrence were uploaded to their respective subreddits and skyrocketed to the top of Reddit within minutes. The fervor intensified as it was revealed that these photos were obtained by hacking iCloud accounts. The insatiable appetite of Redditors was further fed as more explicit photos emerged of celebrities including Kirsten Dunst, Kaley Cuoco, and Mary Elizabeth Winstead.
The incident was soon dubbed “The Fappening.” The subreddit r/TheFappening ballooned, gaining 100,000 subscribers in less than 24 hours and amassing a staggering 141 million page views in a single day. However, as the wildfire spread, ethical discussions erupted across Reddit about the morality of posting and viewing these stolen photos. This led to the banning of r/TheFappening, leaving many users frustrated over the Reddit admins’ lack of communication about the decision. As with most internet phenomena, the storm eventually passed and Reddit’s focus shifted to other topical issues.
And then in 2016, Steve Huffman decided to get all mysterious and tell the world that Reddit knows your dark secrets.
All while Reddit’s website highlighted their main strength of a platform being sudoanonymous. With many users upset over the idea, still one of the most popular comments made fun of the platform’s claim stating: “Then why the fuck did you show me a quilting ad repeatedly for two fucking months.”
Part of the popularity of Reddit has been somewhat of a Wild West environment, with some calling Reddit the vigilante of the internet. They have seen subreddits grow, before eventually getting banned like SonyGOP for distributing hacked Sony files, and Shoplifting – a haven for thieves with a supposed heart of gold for small stores.
And most recently, during the George Floyd protests, 800 moderators said, “Enough is enough!” They signed an open letter, demanding Reddit to get a grip on hate speech. Reddit heard, sort of, and updated its content policy. They even banned around 2,000 subreddits, including some big names like r/The_Donald, r/GenderCritical, and r/ChapoTrapHouse.
Wrapping it up
Alright, folks, let’s wrap this all up.
What Reddit is doing has similarities with recent moves we’ve seen with other social media platforms. Netflix recently said, “No more password sharing, moochers!” And “enjoy the ads or pay for Premium, cheapskate!”
Now, let’s talk about why third-party apps like Apollo are so darn beloved – it’s because they’ve got fewer ads than a monastery. They turn the Reddit experience from an infomercial marathon into something, you know, enjoyable.
But what’s Reddit’s big idea? Let’s blindfold our users with a barrage of ads, blame it on API costs, and then wonder why they’re tripping over themselves. And of course, we have to mention that the Reddit app has a user interface that makes a medieval torture device seem user-friendly?
Now, I get it. When you’re eyeing that jaw-dropping $15 billion valuation, user experience is as disposable as a paper napkin. And, trust me, it’s not just about the API fees. This is about herding users like cattle into a fenced-off ad-palooza.
Will this quest for investor liquidity tarnish user engagement? I can promise you it will. All those users on third party apps likely had high engagement. And Reddit will certainly lose some percentage of those users. To investors looking to sell stock, the users are mere feed for the capital markets engine that Reddit’s founders and investors need to exit their positions.
But be warned, Reddit, tread lightly on the path of ad mania, or you just might end up as another Facebook cautionary tale; but unlike facebook you wont have a world class advertising platform, instagram and whatsapp to turn to.
So be careful overdoing it with your users. And as the old saying goes, “Ads maketh not the user stay.”
Information for this briefing was found via Reuters, Bloomberg, and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
As the founder of The Deep Dive, Jay is focused on all aspects of the firm. This includes operations, as well as acting as the primary writer for The Deep Dive’s stock analysis. In addition to The Deep Dive, Jay performs freelance writing for a number of firms and has been published on Stockhouse.com and CannaInvestor Magazine among others.