Reddit and Platform Politics

Plus! The Boomer Market; Network Effects; Direct to Retail; Strategic Investing; ByteDance and AI; Diff Jobs

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Reddit and Platform Politics

For the last week, large swathes of Reddit have gone dark in protest of Reddit's plan to increase the price of their API. The reaction comes after price hikes rendered some third-party apps economically untenable, and irritated Reddit's power users enough that they banded together to temporarily cripple the site. Most of the subreddits that went dark have come back online (as of this writing, this tracker shows 3,409 of the 8,829 subreddits that participated in the strike are still restricted in some way, though it's skewed to smaller subreddits; r/funny, with almost 50m readers, is back open, while the list of still-closed ones are for things like UK-based mechanical keyboard fans, or people who brew moonshine). This is partly a story about platform economics, but it's also about the social contract and the evolution of legitimacy. It's a classic example of centralizing a decentralized system: "We tried to switch back to running things top-down, and that's when everything went sideways."

Reddit, like most platform companies, has found it optimal to offer a mostly-free service with a handful of paid services. The business of building a status hierarchy where people compete by sharing or moderating content, monetized through ads, has worked well whether the fundamental unit of content is a link (as on Reddit), a short video (YouTube, TikTok), or 140 characters (Twitter). It also works as a vertical-specific model, or a collection thereof, as in the cases of Stack Exchange, Fandom, and SumZero. Most people don't contribute much, but for a subset of them, it pays, whether through status, through indirect economic benefits, or just because it's fun.

Which immediately brings up a question of who really owns the site. There are a few different possibilities here:

  1. As a legal matter, Reddit is owned by its shareholders and managed by its managers. If they want to change the terms of service to increase the cost of API calls, or to replace moderators with people who will reopen subreddits, they're within their rights.
  2. In some sense, though, Reddit Inc. is a sort of trustee for the collective asset built by the people who contribute to the community—posters and moderators. They're what make the site worthwhile. The underlying technology took money and effort to create, but since you can download the site's source code circa 2017 for free it’s probably not the true source of value.
  3. The broadest conception of Reddit is close to a public utility whose main users, and thus biggest interest group, consists of passive lurkers who read the site but never comment. The trick of appending "reddit" to a search query to get answers from real people is so ubiquitous that Google turned it into a feature. These users, in the aggregate, fund the site because they're a large share of ad pageviews. They don't impose any meaningful cost burden other than bandwidth and servers, so they're a profitable demographic.

When the site started, groups 1 and 2 were in control, because they were the same people: Reddit's founders created sockpuppet accounts to post stories so the site wouldn't look empty. Over time, the site grew, and more authority got delegated to unpaid moderators, who create and enforce rules for the subreddits they manage. And those moderators have been very beneficial to Reddit:

On the other hand, the moderators can also make thousands of high-traffic communities inaccessible to users for a few days. There are always tradeoffs.

For context, this is not the first controversy between Reddit's users and the company; a discussion-oriented site naturally selects for people who like to argue, and a site built around virality is also a good venue for making a protest go viral.[1] In fact, during the current CEO Steve Huffman's original time as CEO, Reddit's then-parent company took down a front-page post at the behest of a big advertiser, which seems to have precipitated Huffman's departure from Reddit. So Reddit's CEO is used to dealing with the community, and knows that the general bet is that even if management makes a mistake, the site will keep going.

Huffman has been on a media tour recently to give the company's side of the dispute. One interesting line from one of these interviews: "If you’re a politician or a business owner, you are accountable to your constituents. So a politician needs to be elected, and a business owner can be fired by its shareholders... And I think, on Reddit, the analogy is closer to the landed gentry: The people who get there first get to stay there and pass it down to their descendants, and that is not democratic."

This is apt! The system is somewhat feudal, not in the mildly pejorative sense in which a normal person might dislike it, but in the sense that an anarchist might like it. It’s a complex system of reciprocal social obligations, some unstated, that an outsider simply can’t expect to fully understand.

Many systems have a tension: between decentralization that takes advantage of local knowledge and that converts the social capital of a community into a monetizable asset for the company, and the centralization required to get anything done. And the usual way centralization works, in any system that weights popular opinion, is that the centralizer gets legitimacy by saying they're operating on behalf of the average person. Caesar had his populares, Nixon a Silent Majority, and Perón the descamisados. Operating with this kind of support is democratic in the sense that it turns popularity into legitimacy, though less democratic in the sense that it compresses "political" participation into the binary decision to either vote for the incumbent by sticking around or to leave.

And there's also the meta question about the granularity of freedom: if moderators can decide what shows up on their subreddits, then subreddit members can't. In an interview with The Verge, the interviewer points out that many of the most popular posts on Reddit at the time were complaints about the API policies—and Huffman responded by noting that comments were turned off on those posts: "If there were comments on there, I bet I can tell you what those comments would say. They would say “knock this off, it’s annoying.” Because if you go to the other posts where comments are enabled, that’s what people are saying." (As of this writing, the front page has one post, from the developer of the Apollo app, supporting the blackout. And there's one post complaining about complaints about a subreddit's protest—the imperative to riff and remix content for karma is irrepressible.)

Reddit is making a business decision, here. They say in the Verge interview above that the infrastructure cost of supporting third-party apps is $10m, and that doesn't include the apps' share of their operating expenses or the opportunity cost of replacing ad-supported pageviews with ad-free ones.[2]

Ultimately, Reddit will do what it needs to do to make the business sustainable. Its immediate revenue needs will have to be balanced against what the community wants, but that also requires knowing what the community is. If you look at what community moderators are doing, you'll get a wildly distorted view of what the median user wants. Even if you ask users, the ones who are likely to answer and likely to have strong views will be a distinct group. (As a case study, this post highlights all the sites moving off Reddit—and, in the footnotes, laments the inconvenient closure of a subreddit that could have provided some helpful research.) Reddit has 400m+ monthly active users. Are there 400 million people in the world with strong opinions on AI pricing? Are there even 4 million? The protestors are correct that Reddit is killing businesses that were built on its platform, and Reddit is also correct that these businesses were weakening its ability to monetize, which could eventually threaten the product itself.

And this kind of discussion extends far beyond Reddit. The big downside to having a consumer brand is that the product ends up being one that everyone has an opinion on; the downside to outsourcing important work to unpaid moderators is that they have opinions about what direction the site goes in and what decisions the business behind it makes. And plenty of other companies are in the same position, where much of the value is created by third parties who use the platform but don't have input into how it's run. Strategically, it's better to control anything that's mission-critical for the business, but that doesn't fully solve problems. As Reddit's situation demonstrates right now, it just pits companies against a whole new category of problem.

Disclosure: Long META.

  1. This has happened before, at other companies. When Facebook launched the News Feed, part of their evidence that it was working was that 10% of users signed up for "I Hate the News Feed" groups—it would have been impossible for such content to go viral without that feature, so coordinated opposition actually turned out to be a good sign. ↩︎

  2. Some of the blame for that lies at Reddit's feet, too. The company introduced image and video hosting in the mid-2010s—partly a prudent reaction to the fact that Reddit could deliver enough traffic to overwhelm some sites, partly to avoid link-rot, and partly to ensure that the company had more control over the content that made it valuable. They'd pay less for hosting if they outsourced media hosting to Imgur, but they'd also have a weaker business. ↩︎

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The Boomer Market

A good way to start explaining the existence of the financial system is to point to consumption smoothing: everyone's earnings start at zero, then move up gradually, typically peak in their fifties, and then generally decline to zero. Unless the plan is to live a monastic lifestyle in your early twenties and really get into partying in a big way thirty years later, the usual way to address this is to borrow money early on, especially for housing, and then accumulate net savings that can provide a supply of money to match the next generation's demand for debt. This model has been directionally true for a long time, but there are quirks. The baby boomer generation entered their peak savings years at a time when rates were high and assets were, as a consequence, cheap. As a result, they've been holding equities longer than expected ($, WSJ). For decades, people have speculated (including this author) about what would happen when the boomers started selling equities and homes and moving into other asset classes. Surprisingly, they haven't really done this; the ones who aren't rich don't have much stock to sell, and the ones who are rich don't see the need.

Network Effects

The site where gamers want to stream videos for money is the one with the biggest audience; the site with the biggest audience is the one that attracts the most popular gamers. And people like watching gaming streams. This is the short bull case for Twitch, which dominates video game streaming. But as with other network effects, once it starts unwinding the math works in the opposite direction. A competing site, Kick, has signed a deal with streamer xQc worth up to $100m. Part of the point of this is, of course, to (very expensively) buy an audience. But it's also a way to set up a nice tournament dynamic: newer streamers may choose the platform with the largest headline number in its deals, not the largest immediate audience—which, of course, puts that other platform on a steeper growth trajectory. Of course, the most likely outcome is that the network effect doesn't kick in; the last such deal was with a platform that shut down a year later. But since the odds of failure for a new streaming platform are already high, the question is what they can do that increases the variance as much as possible.

Direct to Retail

The WSJ highlights the trend of companies avoiding direct-to-consumer models and trying to market their product through retailers ($). These things move in cycles: the DTC bet was that companies could understand their customers better with a direct relationship, and could avoid giving up margin to a retailer. But that also required expensive marketing campaigns and distribution; it's harder to ship individual products to end consumers than to ship pallets to warehouses. And retailers were also aware that e-commerce was eroding their foot traffic, and have adapted by changing their offerings. As it turns out, there is some useful specialization in the retail business, and while it's not strictly a bundle-based enterprise, a retailer can end up providing a better selection to customers and wider distribution to suppliers.

Strategic Investing

Japan Post Bank, which has 24,000 branches and ~$1.6tr in assets, is planning to invest directly in startups ($, Nikkei). A big bank has a slight advantage here in that they can track deposit flows across all of their customers, so as long as either depositors are spending money directly with the startups in question or the startups themselves are depositors, a list of the fastest-growing companies in Japan is one SQL query away. Offsetting this advantage is the fact that banks tend to move slowly, and can't put too much of their balance sheet into risky assets (fine in this case; the investment is less than half a percent of assets, and about a tenth of equity—and the deposit base is very sticky). At some point, a majority government-owned bank won't be the ideal vehicle for making this kind of investment since it won't have the right operating cadence, but in that scenario the bank will have a nice markup on previous investments, and will also be tied to the growth of a more dynamic economy.

ByteDance and AI

TikTok parent ByteDance has ordered $1bn worth of Nvidia GPUs so far this year (the linked article says this exceeds all of China's orders for 2022, but Nvidia's 10-K says that China and Hong Kong were responsible for $5.8bn of revenue last year—still a big deal). The first obvious use of AI for a user-generated content platform is to continue improving content recommendations, and an immediate follow-up to this is to improve usability (automatic captions, machine translation, video effects). But in the long run, the better recommendations get the more likely it is that the best recommendation is something that doesn't exist yet, but could.

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