Reddit filed to go public on Thursday (PDF), revealing various details of the social media company’s inner workings. Among the revelations, Reddit acknowledged the threat of future user protests and the value of third-party Reddit apps.
On July 1, Reddit enacted API rule changes—including new, expensive pricing —that resulted in many third-party Reddit apps closing. Disturbed by the changes, the timeline of the changes, and concerns that Reddit wasn’t properly appreciating third-party app developers and moderators, thousands of Reddit users protested by making the subreddits they moderate private, read-only, and/or engaging in other forms of protest, such as only discussing John Oliver or porn.
Protests went on for weeks and, at their onset, crashed Reddit for three hours. At the time, Reddit CEO Steve Huffman said the protests did not have “any significant revenue impact so far.”
In its filing with the Securities and Exchange Commission (SEC), though, Reddit acknowledged that another such protest could hurt its pockets:
While these activities have not historically had a material impact on our business or results of operations, similar actions by moderators and/or their communities in the future could adversely affect our business, results of operations, financial condition, and prospects.
The company also said that bad publicity and media coverage, such as the kind that stemmed from the API protests, could be a risk to Reddit’s success. The Form S-1 said bad PR around Reddit, including its practices, prices, and mods, “could adversely affect the size, demographics, engagement, and loyalty of our user base,” adding:
For instance, in May and June 2023, we experienced negative publicity as a result of our API policy changes.
Reddit’s filing also said that negative publicity and moderators disrupting the normal operation of subreddits could hurt user growth and engagement goals. The company highlighted financial incentives associated with having good relationships with volunteer moderators, noting that if enough mods decided to disrupt Reddit (like they did when they led protests last year), “results of operations, financial condition, and prospects could be adversely affected.” Reddit infamously forcibly removed moderators from their posts during the protests, saying they broke Reddit rules by refusing to reopen the subreddits they moderated.
“As communities grow, it can become more and more challenging for communities to find qualified people willing to act as moderators,” the filing says.
Losing third-party tools could hurt Reddit’s business
Much of the momentum for last year’s protests came from users, including long-time Redditors, mods, and people with accessibility needs, feeling that third-party apps were necessary to enjoyably and properly access and/or moderate Reddit. Reddit’s own technology has disappointed users in the past (leading some to cling to Old Reddit, which uses an older interface, for example). In its SEC filing, Reddit pointed to the value of third-party “tools” despite its API pricing killing off many of the most popular examples.
Reddit’s filing discusses losing moderators as a business risk and notes how important third-party tools are in maintaining mods:
While we provide tools to our communities to manage their subreddits, our moderators also rely on their own and third-party tools. Any disruption to, or lack of availability of, these third-party tools could harm our moderators’ ability to review content and enforce community rules. Further, if we are unable to provide effective support for third-party moderation tools, or develop our own such tools, our moderators could decide to leave our platform and may encourage their communities to follow them to a new platform, which would adversely affect our business, results of operations, financial condition, and prospects.
Since Reddit’s API policy changes, a small number of third-party Reddit apps remain available. But some of the remaining third-party Reddit app developers have previously told Ars Technica that they’re unsure of their app’s tenability under Reddit’s terms. Nondisclosure agreement requirements and the lack of a finalized developer platform also drive uncertainty around the longevity of the third-party Reddit app ecosystem, according to devs Ars spoke with this year.
Reddit’s average daily user base has grown since the API changes
Reddit’s SEC filing also provides a peek at user numbers, which seem to have increased since the protests that started on June 12. Here’s how many daily average unique users Reddit claims it has had globally since Q3 2022, in millions:
- Q3 2022: 57.3
- Q4 2022: 57.5
- Q1 2023: 60.3
- Q2 2023: 60.4
- Q3 2023: 66
- Q4 2023: 73.1
In the US specifically, Reddit’s daily average unique users reportedly climbed from 28.7 million in Q2 2023 to 36.4 million in Q4 2023.
However, the overall growth in daily users may be attributed to people moving from third-party apps to Reddit’s native platforms, so growth may not continue, Reddit said.
Interestingly, the percentage of daily average unique users who are logged out of Reddit versus those who are logged in has increased slightly. This is important because Reddit doesn’t make as much money off of people who look at its site or app but aren’t logged into Reddit.
In Q2 2023, the percentage of daily average visitors who were logged out of Reddit was 46.9 percent. In the US, the percentage was 46 percent. Those numbers increased to 50.2 and 51.4 percent, respectively in Q4 2023, compared to 47.8 percent and 46 percent, respectively, in Q4 2022.
According to Reddit, logged-out users represented 75 percent of “incremental users added since July 2023.” These people typically “do not monetize at the same rate as logged-in users” and spend less time on the site.
“Currently, monetization of these users is mainly through conversation pages and feed ads. Measuring the number of logged-out visitors is difficult and complex,” Reddit’s filing says.
Ads and AI
Reddit shared business growth plans that include focusing on its advertising business, which made up 98 percent of its revenue in 2023 and 2022, and licensing data for large language models (LLMs).
One of Reddit’s advertising initiatives is around adding “additional contextual and interest-based signals and intelligence into” its advertiser platform to help targeting. Reddit pointed to “potential future opportunities” for advertising, including “ads in comment threads and on search pages; video ads.”
Further, like many companies, Reddit is trying to determine how to make money from generative AI. Its filing acknowledges that this is a growing area and that it’s unclear how much success it and the broader industry will have or how much generative AI will cannibalize Reddit’s own business.
One of the primary reasons Reddit cited for its API rule changes was LLMs profiting off its data for free. This week, Google announced an AI content licensing deal with Reddit. Neither company has confirmed the deal, but Reuters, citing an unnamed person “familiar with the matter,” reported that the deal is worth approximately $60 million per year.
Reddit currently has a small number of medium-term-length data licensing agreements, it says, but “substantially all of the contract value associated with our licensing revenue is derived from one of our partners,” ostensibly Google. The filing reveals that over the next three years, Reddit plans to make $203 million in revenue from AI data licensing.
It’s no secret, though, that today’s generative AI tools can have mixed—if not alarmingly inappropriate—results. Reddit’s AI licensing deals could become less valuable if LLMs can’t properly decipher and sort through the abyss of jokes, memes, satire, sarcasm, and parody that Reddit is known for.
Reddit’s IPO date hasn’t been announced yet. Its filing confirmed that the 19-year-old company is not profitable; it ended 2023 with $69 million in losses. Revenue, however, grew 21 percent in 2023 to $804 million.
Advance Publications, which owns Ars Technica parent Condé Nast, is the largest shareholder of Reddit.