Reddit: The Internet’s Bellwether

In August 2005, Kevin Kelly, co-founder of Wired magazine, had an epiphany: We had overlooked the majesty of the internet. “Kings of old would have gone to war to win such abilities,” he wrote. “Only small children would have dreamed such a magic window could be real…The success of the Web at this scale was impossible. But if we have learned anything in the past decade, it is the plausibility of the impossible.”

This was nearly 20 years ago! The “plausibility of the impossible” has been pushed far beyond what Kelly wrote about. The digital miracles of today, wonders like LLMs, weren’t on the radar back then. 

On Kelly’s list of the advances of 2005—which includes “road maps with driving directions…help wanted ads…tax forms, [and] TV guides”—were a select few services that have printed cash, like Intuit making billions with its tax prep software Turbotax. But most others have gone the way of the dodo. Look at how any company involving TV that isn’t Netflix has struggled to turn a profit.

One of the few remaining sites from that period is Reddit, the last great social media company of the early 2000s. The company, which sees 76 million users log on daily to post and read content they can’t find anywhere else, recently filed its S-1 to go public. Reddit is the closest thing we have to a global community expertise graph—anyone can share what they know best, whether that’s strange bugs or financial independence. It is a miracle. It is so much better than the regular internet that most Google queries can be improved by simply tacking on Reddit's moniker at the end of your question. 

Reddit is perhaps the embodiment of Kelly’s plausibility of the impossible. And yet, like all of its social media peers that aren’t owned by Mark Zuckerberg, it is a remarkably middling business.

According to its S-1, the company grew revenue by 21 percent, with $804 million in 2023, and daily active users are up even more, over 27 percent year over year. Unfortunately, the average revenue is down 2 percent year over year to $3.42 per user. The company lost $91 million last year—mostly driven by a staggering $439 million in research and development expenses (typically software engineer and designer salaries), which is 55 percent of its revenue. That ratio of spend would be fairly normal for a startup that’s three to five years old, but Reddit was founded in 2005. When Facebook went public in 2012, it ended that year with 27 percent of revenue being spent on R&D. 

The past 20 years of the internet have taught us one lesson: Enormously useful does not equal enormously profitable. Take Snapchat (which had 414 million daily active users last year) or Pinterest (which had 498 million monthly active users in the same period), both of which have been mediocre successes at best. To build a winning company, you need multiple overlapping strategic advantages and the internal culture necessary to execute those advantages.

Reddit’s defense is that it “[d]id not begin meaningful monetization efforts…until 2018, and we are currently exploring new strategies for monetization.” Not trying to monetize until 13 years after being founded is, by definition, a ZIRP.

But I’m not quite prepared to write Reddit off as a soon-to-be-failure created by the conditions of the old internet. It’s because 2024 has something different—AI.  

What is Reddit and the internet in the age of AI?