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Reddit has big plans for search ads and a mixed feed as it adjusts to life as a public company

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Reddit is now treading the well-worn path of many platforms before it: the quest to gather a large enough user base to attract brands without alienating its core audience.

This journey isn’t new; it’s been on this trajectory for the past six years. However, since going public in March, the pace has certainly picked up. The plethora of hires, introduction of new ad products, and agency tours that have ensued since then demonstrate just how rapidly the business is evolving. And with its first earnings update as a public company looming, it’s clear that Reddit will need to move even faster in the future.

Let’s kick off with the silver lining: daily active users skyrocketed to 82.7 million in the quarter, marking a 37 percent increase compared to the same period last year. With such a surge in user engagement, advertisers naturally followed suit. Over the same period, ad revenue surged by 39 percent, totaling an impressive $222.7 million.

Now for the not-so-great, albeit unsurprising, news: during that time, the business incurred more than double that amount in losses — a hefty $575 million, to be precise.

AI could be one way Reddit looks to stem those losses. 

The platform is licensing its vast trove of data to major language developers, allowing them to train their models on its diverse array of text-based content — spanning message boards covering topics ranging from politics to anime. Revenue from these data licensing agreements has surged by over 450% in the past year. However, skeptics question the sustainability of these gains as LLMs evolve and seek out more sophisticated datasets.

In short, Reddit is off to a good start but there are far bigger challenges ahead on the horizon. One major hurdle is the upcoming U.S. election, which the company’s COO, Jen Wong, discussed with analysts during its recent earnings call yesterday (March 7). The same goes for inflation and other geopolitical events that could stunt the flow of ad dollars into the business.

Issues like this underscore the magnitude of the challenge ahead for Reddit. Despite being among the top 15 websites globally, according to SimilarWeb, it generated only $800 million in revenue last year, which is less than Instacart ($940 million) and Uber (with a $900 million revenue run-rate on its ads business). This is particularly striking considering Reddit’s nearly two-decade tenure. If it couldn’t significantly expand its ads business over the past 19 years, there’s a daunting road ahead.

Despite all that, Reddit remains a cornerstone of the social web, boasting tens of millions of users who engage in some of the internet’s most vibrant niche communities. That resilience is a testament to Reddit’s trump card: decentralized content moderation.

While Facebook, YouTube, and Twitter enforced uniform regulations, often sparking widespread discontent, Reddit took a different approach. It aimed to recreate the intimacy of a neighborhood block party online. Instead of funneling users from diverse backgrounds into a single feed, which often resulted in heated debates, Reddit prioritized discussions among like-minded individuals.

“We win by doing what we do well and what we do well is we’re the world’s largest platform of communities where people come for conversation,” Wong told Digiday in an interview prior to the earnings update. 

For advertisers, this means doubling down on contextual and interest-based advertising. It’s a shift that might take some getting used to for marketers accustomed to tracking users based on personal info elsewhere. Nonetheless, Reddit believes this stance makes its ads business, and therefore its advertisers, more resilient to the loss of tracking signals that other platforms rely on.

So far, this approach has only gained traction with a select group of advertisers. In fact, just 10 advertisers accounted for over a quarter of Reddit’s ad revenue in 2022 and 2023. Even so, there have been noticeable indicators of change in the last quarter.

Here are some of the more interesting ones Reddit cited to analysts: Firstly, ad revenue growth was primarily fueled by an increase in impressions, despite a decline in pricing compared to the previous year. Secondly, click-through rates surged by over 40% in the quarter, indicating that more performance advertisers experienced increased traffic and conversions after advertising on the platform. Finally, ad spending across various business scales, including scaled businesses, mid-market ones, and SMBs, outpaced total revenue growth.

“The company’s focus on delivering full-funnel ad performance, from broad reach to personalized product recommendations, is paying off,” said eMarketer’s senior director of briefings Jeremy Goldman. “The rollout of shoppable ad creatives that insert promotions into relevant product discussions is a shrewd move that monetizes Reddit’s high commercial intent conversations.”

Expect search ads to feed into those plans eventually. CEO Steve Huffman said as much on the earnings call. While no specific timeline was provided, he highlighted the platform’s substantial volume of over a billion search queries per month, suggesting that serving ads against these results would be inevitable. It’s a similar story with video as Reddit transitions from its origins as a text-based social platform to a more visually-oriented one, aligning with the trends of platforms centered around images, short clips, and live streaming.

“Making a mixed media feed work really well with text and links that can hold their own alongside video and gifs is really important to us,” said Huffman. “I think we’ve made some progress but I also think there’s plenty of room for improvement there.”

https://digiday.com/?p=544198

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