Reddit – a popular social media and discussion board – has created significant waves after announcing an intention to charge for access to its API. The Reddit API is used by other developers to create automation, programs, and, most importantly, 3rd party clients. This announcement has led to widespread outrage on Reddit. In this post, I’ll review the multi-sided nature of Reddit, why Reddit is charging for the Reddit API, the financial impact, and the community response.
Table of Contents
Overview of Reddit
Reddit is a multi-sided market consisting of users, mods, advertisers, and developers.
Reddit users post articles, links, photos, videos into communities. Other Reddit users then consume and vote on posts and can also comment and discuss. In 2021, Reddit has 52 million daily users and 430 million once a month users.
Mods set the rules for their communities and review posts and comments to ensure they comply with the rules of the community and Reddit. Mods are essentially an unpaid labor force who do the janitorial work of managing the social site.
Next, advertisers run ads, sponsored posts, and sponsored Q&A on Reddit. It’s hard to get accurate data, but the most recent revenue number is estimated at $400MM USD in 2021.
Finally, developers have built profitable applications tied to Reddit or have built mod tools that make their life easier. More on this later.
Reddit has filed paperwork with an SEC for an IPO. They are almost certainly carefully managing financial performance in expectations of this event.
History of Reddit API and Reddit Clients
Reddit’s API was introduced back in the early 2010s to allow other applications and tools to integrate with Reddit. Much of the original API usage was centered on moderation tools that helped mods to manage spam and users who broke the community rules. Access to the API has always been free.
Reddit started as a text page heavy layout and migrated to a newer HTML5 style interface in 2018. That change was pretty controversial but allowed for a better mobile experience as well inline images and videos. Mobile apps were historically developed by 3rd party developers and utilized Reddit API for free to ensure a clean integration. Reddit encouraged 3rd party developers as they had limited resources and the mobile world was still very uncertain. Later, Reddit launched their first mobile app in 2016 which immediately competed with its 3rd party clients. By 2022, 72% of Reddit’s users used a mobile device and 29% used desktop.
Reddit’s own mobile client has features – such as mobile chat – that are not present on the 3rd party apps. Reddit does not publish an API for these features – assumed to drive users to their own apps. Crucially, Reddit’s own mobile app serves advertising that benefits Reddit. 3rd party mobile apps do not and cannot serve ads – which increases their popularity with users, but also put them in Reddit’s crosshairs.
Financial Impact of Ending Reddit 3rd Party Clients
It’s hard to find the numbers of users who use 3rd party clients in favor of Reddit’s, but we can guess at the market share by looking at the number of ratings on the Android and Apple Store. That’s obviously dangerous, but it gives us a sense of magnitude.
We also know how many users Reddit has and what percentage use mobile. That gives us an estimate of how many users are using Reddit’s own and their 3rd party clients.
Moreover, I would expect that a higher percentage of people using third party apps surf Reddit daily. I assumed 20% more likely. So that adjusts the user estimates:
Our best estimate of advertising revenue is 400MM USD per year. We can break that down by desktop and mobile since 72% of users use Mobile. I would also guess that mobile users are more likely to visit ads as ads are more intrusive on mobile and less likely to be removed by adblock.
I then do a hokey series of calculations to adjust that daily visitors are much more likely to visit ads. I took it at a 6x difference, but there’s a lot of room to argue on that number. Keep in mind, that Reddit is not earning any revenue on ads for 3rd party clients. That gives us a breakdown of revenue from the Reddit app between monthly and daily users.
Finally, that gives us enough information to estimate how much Reddit stands to gain if they can stomp out 3rd party clients.
And that gives us an estimate of about 56MM USD per year or an increase of 14% versus our estimate of 400MM USD in revenue. In light of the impending IPO, it’s not surprising that Reddit has taken this path.
That breaks down to about $.06 of revenue per user per year for monthly users or $.34 per user per year for daily users. The developer of Apollo estimates that it would cost about $2.50 per user per month in API fees to service the existing users of the app. We have to assume based on this data that Reddit set the API pricing in a fashion that would end 3rd party clients.
I would also call out, while Reddit would make 50MM USD in revenue by shutting down the 3rd party clients, the 3rd party app developers are certainly not making that much money collectively. Reddit presumably has more serious ad delivery mechanisms to monetize their users while most 3rd party app developers – while creating really good clients – mostly monetize via freemium subscription or pay once options.
The other way to consider the API fees would be based on their cost to run. Unfortunately, it’s pretty hard to find data on server consumption, development hours and so forth. So I’m unable to analyze that side of it.
Finally, I like to say what assumptions I think are here that I made. These could make my estimates wrong:
- There are enough potential advertisers to fill the funnel.
- There won’t be a user backlash to the shutdown and/or users of 3rd party apps will migrate to the official Reddit app.
- I have two parameters in the model on how more likely mobile users are to click an ad versus desktop; and how likely 3rd party app users are daily users versus monthly users.
- App ratings are a good proxy for market share.
Reddit API’s impact on Mod Tools
The other key use case for the Reddit API is for moderation tools. Mod tools are used by the mods of communities to automate many admin tasks as well as provide engagement with their communities. Reddit in their announcement post primarily focused on the impact to moderation tools. Reddit simply announced that they would waive the API fees on moderation tools, and moreover they announced new additional features for moderation tools.
If I’m doing the analysis right, Reddit really wanted this change to not make mods angry. As part of the multi-sided network, the moderators do a lot of unpaid work that makes Reddit successful. Hamstringing their tools or causing them to be less efficient would not have been in their best interest. Adding more tooling and features; while exempting mod tools from the data platform fees was probably carefully considered in Reddit’s change. All of that said, many mods use 3rd party apps and mod tools have been a constant source of complaint from the mods.
Backlash of the Reddit API change
Due to the change and widespread publicity of 3rd party apps being shutdown, over 1000 communities plan to temporarily go dark. Some of these communities even intend to shutdown permanently or migrate away from Reddit to alternative platforms. I don’t have much data on the composition of these communities in aggregate.
The arguments are three fold. First, Reddit has done the 3rd party application developers dirty by encouraging them to build mobile applications in the early 2010s to avoid its own development efforts and then pulling out the rug from them. Second, charging for the Reddit API is going to degrade the mod tools which are already not effective. Finally, users prefer 3rd party applications versus the official Reddit app.
Reddit is trying to thread a needle between shutting down 3rd party applications for the significant financial gain, while not upsetting the mods who do much of the unpaid labor of the site. It will be interesting to see if the decision to charge for the Reddit API will pay off for Reddit or if it will lead to a larger exodus from the site. Expect many companies to be watching closely.