A Breakdown of Reddit’s Really Simple Business Model (Tech Strategy – Podcast 198)


This week’s podcast is a deep dive into Reddit, the “community of communities, driven by interests and passions”.

You can listen to this podcast here, which has the slides and graphics mentioned. Also available at iTunes and Google Podcasts.

Here is the link to the TechMoat Consulting.


Related articles:

From the Concept Library, concepts for this article are:

  • Network Effects: Clustering
  • Audience Builder Platforms
  • Complementary Platforms: Complementary Mini Platforms
  • Communication and Content Services: Differentiation
  • Retention Strategy: Community and Content

From the Company Library, companies for this article are:

  • Reddit

Photo by Brett Jordan on Unsplash

——–transcription below

Welcome, welcome everybody. My name is Jeff Towson and this is the Tech Strategy Podcast from TechMoat Consulting. And the topic for today, a breakdown of Reddit’s really, really simple business model. Now, Reddit is finally going public after 18 plus years, a lot of history there, a lot of drama, including recently, which we’ll talk about. But I thought I’d talk about the strategy aspect, the business model aspect. Because I think it’s actually pretty straightforward, and it’s not quite what they say. It is, in my opinion. So I’ll give you sort of how I look at it and the three or four there’s really three interesting strategy lessons in this and also to highlight which what I think they are and sort of break it down. Okay so that will be the topic for today. I don’t think I have any housekeeping stuff. Nope. Standard disclaimer, nothing in this podcast or my writing or website is investment advice. The numbers and information from me and any guests may be incorrect. The views and opinions expressed may no longer be relevant or accurate. Overall, investing is risky. This is not investment legal or tax advice. Do your own research. And with that, let’s get into the topic. Now I’m gonna skip over sort of the quick tech news for the week. Obviously the big story is Gemini. Google has released what I think can best be described as a super racist AI. There’s no way around it. It’s unbelievable. Anyways, that’s all over the news. I’m not gonna talk about that at this point. The only other thing I guess tech news would be related to Reddit, which not this week, but in the last month or so they did a deal with Google. I think it was in December technically. That basically they get $60 million a year to show Google their data, which is basically conversational information. It’s a Reddit, it’s a lot of subgroups and chats, and that’s feeding into the LLM, and they get money for that. And if you’ve heard recently, their organic search results and traffic has shot up dramatically in the last month, which appears to be right after they did the deal with Google. So it’s good to be friends with the people that own the search engine apparently. Anyways, not going to talk about that stuff, but it was in the news. I don’t know too much about it other than what I’ve just read. Okay, so let’s get into the topic, which is strategy stuff, which is my area. Now, a couple points here I’m going to go through. First of all, I’ll give you sort of the summary of Reddit, for those of you who aren’t familiar. Their S1 has been filed. You can read the report. It’s not bad. So I’ll give you a quick breakdown. And then number two, we’ll talk about, OK, how do you see this business model? How do you describe it? I think once you describe it accurately, it becomes a lot simpler and easy to understand. I think the way they describe it in their S1 does not really do that. In fact, I think their description is not helpful, generally speaking. Third point we’ll talk about, okay, how is Reddit different Okay, how is Reddit different than its many competitors? Facebook, Roblox, Twitch, X. I mean, it’s got a lot of companies that do fairly similar things. So how is it different? And that’s where I’m going to give you basically three strategy ideas. And then the last bit we’ll finish up with is red flags. For those of you who are investors, I mean I’m amateur retail investor, not professional. There are red flags all over this thing and I’ll give you my list. Like as I went through the S1, I must have written the word bullshit like 10 times with a big star next to it. Like I’ll give you my short list and you can decide for yourself how concerning certain things are. Anyways, what we’ll get into that. Okay, so let’s start with the first bit, which is what is this business? All right, so Reddit launched in 2005, Steve Huffman, founder who’s now back as CEO. You know, they kind of got traction in 2006 when they did their first AMA, ask me anything. You know, it’s a place you can go to ask questions, read questions, things like that. They got acquired around the same time with Conda Nast. So taken internally, then they came out public again as a standalone company. 2015 or so, Steve Huffman comes back. He’s pretty much been in Charge ever since but here’s how they describe it in their their s1 You know quote a community of communities driven by interests and passions Okay, some of their other language. We bring community belonging and empowerment to the world Okay, so it’s you know anyone who’s been on Reddit, it’s a, it’s a about a hundred thousand subreddits, which are basically chat groups. It’s like Facebook groups, but there’s a hundred thousand of them and people have these in-depth discussions on everything like how to build a computer, where to go on vacation. So it’s a place people go to ask questions and get answers from other people. But they say it’s a lot more than that. So here’s some of their phrase. They say we quote, “This is a place where you can explore interests, learn, create, express themselves, connect with minded people about any topic you can understand things. So it’s okay, we’re kind of talking about, you know, connection, chat and content, right? So it starts to sound a lot like Facebook, really. It starts to sound about it like a lot of companies, actually actually because there’s a lot of this sort of communication plot chat businesses out there. The difference they would say is unlike a company like Facebook which is you know it’s about the main newsfeed which is based on who you know your connections your social network. This is mostly about sub communities not one main newsfeed and it’s mostly about sub communities, not one main newsfeed. And it’s mostly about interests, not who you know. And in fact, most people on Reddit are not using their real name, you sign up with your email. And you could say it’s and you can basically stay anonymous if you want, and some people do and some people don’t. Okay. Now, how would they describe it in their, you know, their s one, they describe themselves as a growing city with a hundred thousand unique neighborhoods. So the subreddits, the chat groups basically are neighborhoods and each neighborhood has its own slang, its own vibe, its own written and unwritten rules. These neighborhoods, these subreddits are user created. And Reddit, the company basically provides the infrastructure of the neighborhood, the roads, and it also provides the rules and the governance for the city. But within the neighborhoods, in each subreddit, you have a couple things. You have a topic, and this whole thing is interest-based. You have users who are posting and chatting and talking, and then you have a topic. And this whole thing is interest based. You have users who are posting and chatting and talking, and then you have a moderator. Usually the subreddit is created by the moderator. So the moderation. So it’s human to human interaction is the first thing. And then second to that, the moderation, the content creation, the rules are set by a human in the subreddit. So that’s a little different. Now, there is a main news feed on the main part of rabbit Reddit where you have on top of that, you have general rules for the whole platform in terms of moderation. So there’s rules at the Reddit level. There’s rules at the subreddit level governance, what you can say what you can’t, those are step by the moderator. And then it’s so they say this is a human created and a human curated organization, which makes it more authentic as is something as opposed to something that’s all algorithms, like, you know, kind of Facebook is like that. Okay, so I’m sort of giving you their language. They would talk about their mission, They have a mission. It’s about community belonging, empowerment, a global digital city. They talk about the power of communities we can learn from each other. We can engage in authentic conversation. We can explore our passions. We can research new hobbies. We can find belonging because one of the things when you start talking about community, these subreddits in many senses can be communities, that starts to get you into the idea of identity. You know, I’m a believer in this idea. So the community aspects interesting, and I’ll talk about that, that’s actually one of the things I think is compelling. Now outside of that they also talk about how there is some degree of peer-to-peer commerce where people can sell to each other. You can offer your services, people can pay you. So there’s a bit of a marketplace happening as well. That’s most of their language. Anything else? I like to put down how companies talk about themselves. I think that’s pretty helpful. Pretty much that’s it. They talk about, you know, people powered curation, community powered recommendations. It’s a flexible canvas. You can do text, you can do images, you can post polls. The moderators can create a different look for each subreddit, things like that. And then there’s also a little bit of cross posting. So one community can post into another you can share between the communities, the subreddits, which is kind of interesting. And then to some degree they have bots, I’m sorry, APIs that you can open up to developers. Okay, so that would be a simple their language explanation. I’ll give you my simple explanation. I think it’s a big chat room with 100,000 sub chat rooms, right? That’s that’s kind of how Elon must describe Twitter not too long ago. He basically said, “Look, Twitter is just a big chat room. If you can dress it up all you want, it’s a big chat room.” Okay, this is a chat room with a ton of smaller chat rooms. Fine. It is a fairly small company compared to its competitors. It has what I would describe as crap financials and not impressive management track record in terms of innovation, monetization, and a lot of things. That’s my short Jeff’s version of what we’re looking at here. Okay. Now, what business are they in? They’re in the content and communication services business. They’re a chat room. Okay, let me go into that. So that’s the business model. Everybody chats, you have users, you have moderators, and then on top of that you have advertisers. And to a much lesser degree, you have developers who can write some degree on top of that. Fine. We look at the financials. Not awesome. I mean there’s no way around it. They’re really not awesome and I have a lot of questions. Now first thing is they only publish two years of financials, 2023/2022. Anytime a company goes public and they only give you two years of financials, the years before are not as good. That’s generally true. 2020, $800 and $4 million of revenue, 98%, 95, 90% of that is advertising revenue. Now they will tell a story about how they’re moving into monot, they say, say, we have three revenue models. We have advertising. We have monetizing our data. And then we have a marketplace, sort of what they call user commerce, peer to peer commerce. OK, the second two are mostly theoretical. It’s all advertising right now. So $804 million revenue, 2023, that’s not– when I say they’re small, that is much smaller in terms of the competitors you would look at for them. And the year before that 2022 is 666 million dollars. Okay, generally speaking, the year I generally ignore the last year’s financials when a company goes public because I know they’re boosting the numbers to make it look good for the IPO. So I would be looking at the 600 number 666. Now in theory they should have a very very high gross margin 75% something like that and then they basically do it’s just a software company. I mean there’s no ops right and they basically do their cost of revenue for 2023 is about $111 million out of $804 million. And then you look at their R&D below that. Their R&D is about 54% of their revenue. I have no idea why it would be that high. That’s very strange. Their sales and marketing is about 28 to 33% of their revenue over the last two years. That’s also high, but at least I can understand what that is, is a lot of their traffic, a significant portion of their traffic is coming from things like search engines. If you think about how you use Reddit, I use Reddit sometimes. It’s generally because for me, I have a question. I’m trying to find the answers to something I might type it into Google. It would immediately one of the top search results would be the answer to that question within Reddit. And you actually if you look at your search results you will see a lot of answers are Reddit answers, human answers to your question. So net net the operating income for 2023 negative $140 million against 804 million revenue and 2022 is pretty similar. So, okay, you know, going public on negative operating profit is not something you generally want to do if you can avoid it. So anyways, not awesome, generally speaking. And the other thing that got my attention is their staff. They had 1400 employees in 2021. In 2022, they increased that to 1900 employees. So they added 500 plus people in one year. I don’t understand that either. So there’s a lot of stuff one year. I don’t understand that either. So there’s a lot of stuff in here. I don’t understand. All right, last bit on this. Management, revenue’s not huge. Most of the things they talk about in their S1 are theoretical. We are going to go into e-commerce. We are going to go into data licensing. We are going to go international. It’s overwhelmingly an English site. There’s no other languages for the most part. It’s in very few countries. They talk about we’re going to India, we’re going to Brazil. Okay, what have you been doing for the last 10 years? If you look at them, not a lot of video, their monetization only really started in 2018, as far as I can tell. And then when you look at the key operating metrics like daily active users over monthly active users, it’s about 27%. Facebook is 75%. Of the percentage of people that use it monthly that are also amusing at daily Facebook, 75%. This is 27%. So that’s not that great. And then their growth rate in their DAUs is like 5 to 7% per year. Yeah, you have to exclude the last year because they jumped in the last year, which I probably related to IPL. If you look before that DAU growth is about 5 to 7% per year. The MAU growth is about 1 to 3 percent. So I’m not seeing the growth. I’m not seeing the engagement. I’m not seeing the monetization. I’m not seeing the revenue. Anyways, that gives you my first point, which is, look, it’s a fairly simple business model, not hard to understand. It’s a chat room with a ton of smaller chat rooms. The financials are not awesome. It’s a very small relative to the other players that do similar things. And the management seems slow. I don’t know what’s going on, but it kind of looks a little bit like Twitter before Elon Musk took over, right? And then once he took over, everything started to change quickly where the other question was, why wasn’t it changing quickly for like 10 years? Nothing was going on at Twitter for 10 years. And then suddenly everything started to move. So maybe a little bit like that. Okay, so that’s point number one. Okay, so let me get to the point, which is, how do you view this business model? Here’s how I view the business model. is how do you view this business model? Here’s how I view the business model. A couple weeks ago, I did a podcast and some articles on Facebook. And I basically broke down in my opinion how to think about the Facebook business model, which I just this podcast 193. For those of you who are subscribers, I sent you two or three articles on breaking down Facebook and I’ll do the same thing for Reddit. ‘Cause I think actually, I don’t wanna just throw stones at a business, fine, whatever. I wanna talk about the business model. ‘Cause that’s valuable to understand digital strategy. So I basically said Facebook, what meta, was four networks and two platform business models. That’s what I see and they all help each other, which is a powerful business model, complementary platforms. Okay. When you break apart Facebook, what you see is two networks that provide communication services. So that’s like WhatsApp. That’s their messenger. That’s Facebook messenger. And what those two networks do is they basically allow you to connect with people and to communicate. So those are connection and communication services based on networks. Those are the basically four networks they have. Now in addition to that they have two platform business models. You build platform business models on networks can be networks of people usually can be networks of protocols. They can be networks of physical infrastructure, but in this case, people. Now, the two platform business models they have, which are the Facebook news feed and Instagram, those are audience builder platforms. You know, you can basically separate the users of the platform into two user groups, one that creates content and one that views content or consumes content. Now, the distinction between those user groups is a little bit of a sliding scale. Sometimes it’s very, very clear. People who create YouTube as an audience builder platform, people who create YouTube videos are clearly distinct from people who watch YouTube videos. We have content consumers and we have content creators. And a lot of the content creators can be amateur, or they can be professionals, they can be large organizations like Warner Brothers. Okay, that distinction can get a little blurry. And as you move more and more to a back and forth sort of chatting situation, I think TikTok blurred the lines because it became so easy to create videos that a lot of consumers became creators. At a certain point, it’s kind of hard to make a distinction. Look, if I go in a Reddit subgroup, someone’s going to post a topic. I have a question. Quora is the same. Juhu. Someone might pose a question. How do I fix this broken outlet in my home? And then a lot of people are going to post responses and really the replies become the content that matter. So at that point, when it just becomes a freewheeling back and forth discussion, the distinction between content creator and content consumer, it’s kind of hard to see. But I still consider so you have to kind of make a judgment call. Is this ultimately just a communication service? Like WhatsApp, a ultimately just a communication service like WhatsApp, a network with a communication service where people are just having conversations? Or is this really an audience builder platform with creation of content and consuming? Now, I think I would put Reddit as an audience builder platform. I think it’s closer to YouTube than it is to WhatsApp. Yes, I think people are posting content because their goal is to get a response and build an audience of people who follow them. I think that’s what’s going on mostly. But the line gets a little blurry. Okay. So when I look at Reddit, I see an audience builder platform business model. That’s most of GOPE what’s going on. But it’s kind of an innovative one. It’s actually, I think, really clever. Unlike, let’s say, the Facebook news feed. It’s not one major sort of service, like YouTube YouTube every video you’d ever want to see no It’s a hundred thousand smaller chat rooms. So it’s not the Facebook news feed. It’s Facebook groups Which is you know, I’m in some Facebook groups. It’s super helpful About getting visas to certain countries or writing motorcycles in other countries to certain countries or writing motorcycles in other countries. So it’s not one main audience builder platform. It’s lots of small audience builder platforms that are all kind of complimentary to each other. Now on top of that, there is a main feed on Reddit that has the best host from everywhere. But generally, most of the action happens in the subreddit. So that’s kind of how I would view it. I would almost view this as a collection of mini platforms, a collection of mini audience builder platforms that all sort of cross feed and support each other. And that is actually a very clever business model. I mean, that in 2005, 2006, when this was founded, that was a clever counter strategy to Facebook with their one main feed. And to their credit, Facebook then created their own Facebook groups, which is similar. So that’s kind of how I view it. I view it as a series of mini-part, mini audience builder platforms that all are sort of complimentary. That would be my one sentence explanation for the business model. Now there’s other stuff going on and it’s mostly text based. But I think that’s 90% of what’s going on at Reddit. Okay. Now, and what do they do on this audience builder platform? Well, they’re consuming and sharing content that I’ll talk about this in the next section. That has a lot to do with hobbies and seeking information. I’ll talk about that point later. That distinction is actually important. Now, outside of that, that’s 80, 90% of Reddit. The other thing that’s going on is, there’s this idea of community. By joining a group, you are sort of joining something. That’s different than just scrolling in watching videos on YouTube, which is an audience builder. No, you’re actually joining a group and participating, you know, and joining a club, joining a religion, joining an environmental movement. When you join groups like that and you create and become part of a community, there is real power in that. You know, that that is a powerful thing. So that’s something we wouldn’t see on the main audience builder platform of let’s say Facebook That only happens at the sub-read level or the Facebook groups level So when you get to these mini platforms, you do see this community phenomenon, which I think is very important The third thing that’s going on is okay They’re starting to exchange goods and so there could be some e-commerce and marketplace here And we see that again at Facebook. There’s Facebook marketplace. So we can see a lot of what’s going on in Reddit in Facebook. All right. That’s kind of what I wanted to say for that’s how I would do the business model. And for those of you or subscribers, I will create graphics for this and send out an article and sort of detail how if I was going to show this business model with a with a graphic here’s what it would look like and I did the same for Facebook and some other company. Okay let’s move on to point three which is how is Reddit different? I’ve just said it’s got a lot in common with Facebook and quite a lot of companies actually but it’s much smaller. And one of my favorite topics is this idea of specialty e-commerce or specialty gaming or in this case specialty audience builder platform, specialty content and community. I like this idea of if you don’t have a scale advantage, can you differentiate enough to be viable long term against the giants? And I’m not saying Reddit is that, but I think how they differentiate is a big question. And there’s three sort of strategy lessons here within Reddit, which I’m going to go on board. Okay, number one, they do differentiate on the user interests and intent. Now, people go to YouTube for very different reasons than they go to Facebook. They go to YouTube for very different reasons than they go to TikTok. There’s a lot of different dimensions to how people consume content and engage in content. There’s a lot of room for differentiation. Now Facebook, I said, was four networks that basically do communication services, chatting, and then two audience builders. The communication services are largely utilities. It is very hard to differentiate a messenger service, which is why those businesses are basically monopolies because they have massive network effects and there’s no way to differentiate. It’s very much a standardized utility. That locks up the space, but when you when you move into e-commerce, when you move into audience builders like TikTok or Spotify, there’s actually a lot of room to differentiate the user what they want. Because there’s a lot of emotion, there’s a lot of things going on. So you can differentiate on the platforms, not so much on the communication services. All right, so I think Reddit actually did that quite well. Why do people go to a site like Quora? Well, they have a question. They go to Quora to answer a question. Why do people go to TikTok? Well, nobody goes to TikTok. Well, some people, not many. You don’t search for a question there. You just mindlessly consume stuff. Why do you go to Facebook groups? Well, maybe you’re looking for some. So you can start to tease apart the user interests and intent. And what you see for Reddit, which I think they actually speak to this well in their S1, they actually do come out. It’s kind of near the end. It’s like a page 140. They actually kind of because they paint this big grand canvas of near the end. It’s like a page 140. They actually kind of because they they paint this big grand canvas of everything we do. But later on they kind of say, okay, look, most of what we’re doing is two to three things. Number one on this list would be users are seeking information. They have a question. They’re trying to figure out something. Now that’s a lot of the reason people go to YouTube. They wanna answer, how do I fix my curtain? How do I cook a pie, whatever? Like my sink is leaking, how do I fix it? There’s a lot of that going on in YouTube. Okay, so seeking information where you’re gonna get an answer, not from an article, you’re gonna get an answer, not from an article. You’re going to get an answer from a human being. That’s where companies like Facebook groups, Reddit, and I think Quora, where you get human answers to more complicated questions. I think that’s significant. So if the number one way they’ve differentiated for users as a service is someone’s seeking information, then they would say, and this is from their S1, their competitors for that are Google, new sites, maybe Amazon, maybe Twitter, and large language models. So I would also put Quora on there, and I would put Facebook groups on there. But that’s a certain set of competitors. And those actually, they list three or four of those themselves under that dynamic. The second way they differentiate is they’re offering their users entertainment. It’s just something to do. Now you would go to YouTube and TikTok for more mindless entertainment. You go to Netflix when you want to be told stories. That’s a different type of entertainment. You don’t watch TV shows and movies on TikTok. There’s no storytelling going on. It’s more mindless, make me laugh, that’s funny. Now Reddit says that entertainment is one of their main sort of user interests. Who are their competitors for that? Well, TikTok, meta, YouTube, snap, X, and Roblox. Those are the ones they list under that dynamic. Roblox is kind of interesting. Third one, Passion and Hobbies. Facebook groups would be a competitor here, which is the one they cite. This is when I want to join the motorcycle group of Southeast Asia on Facebook, which I did. When I want to know about visas for Brazil, I joined the Facebook group for Brazil visas. Okay, that’s not a hobby, but it’s an interest. But people do join these communities cooking subreddits, motorcycle subreddits, fixing computers subreddits. Now within that interest, they point to Facebook groups, they point to Discord, Pinterest, and Twitter, X. Those are kind of, I think, the three main differentiations on the user interest side. And really, number one and number three, I think, are the ones that are compelling. It’s people seeking answers to questions and they want humans to answer it. And then the idea that they have a passion or hobby and they want to join a community for that and learn about it. I think that’s a good way to break down. So that’s kind of strategy lesson number one for Reddit in my view. That was the sort of my biggest sort of takeaway was they have some fairly interesting differentiation in intent and interest for users. However, I also just listed to you a whole lot of really powerful competitors. I wouldn’t want any of those competitors let alone Google Amazon, Twitter, Meta, TikTok, YouTube, Snap, Roblox, Discord, Pinterest, Facebook groups, I wouldn’t want any of those as direct competitors. And then oh by the way, LLMs are coming up as a viable substitute for their main thing which is seeking information. Okay, so that’s sort of strategy lesson number one. Strategy lesson number two of three. This one I think is pretty cool. Does Reddit have a network effect? Well, the main Facebook news feed has a network effect based on a social graph, a social network. YouTube, most audience builders have a network effect. The more content that’s created and shared, the more valuable it’s an indirect network effect. The more valuable that’s created and shared, the more valuable it’s an indirect network effect. The more valuable it is to people who consume content and vice versa, an indirect network effect, two-sided network effect, they say. But I just kind of said that look Reddit is kind of not one big news feed like YouTube or TikTok or Facebook main page. It’s a bunch of mini audience builder platforms. Well, does that mean we have many network effects? Like the more people that join the motorcycle community of Southeast Asia, the more valuable it is to me in terms of content, right? The more people that put well, the more people that it’s more valuable people that are writing and producing content for that and vice versa. So we kind of have a mini network effect in the mini audience builder platforms. So if I’ve just argued this looks to me mostly like a series of mini audience builder platforms that complement and support each other. Does that mean they have a bunch of kind of mini network effects? And then maybe one bigger general network effect because they’re kind of complementary? Yeah, I think so. And we can actually see this in another case, which is WhatsApp. Now, for those of you who have been following me for a while, you know I don’t like Moore’s law. I think it’s 90% wrong. The idea that the more people you connect in a network, the more value the network has, and it goes up pretty much exponentially. I think it’s a mathematics. I think that applied well when we were talking about protocol networks, where the more computers that hook together in a protocol system, the more valuable the network becomes. That’s true. That’s Moore’s law. But most of the time when we’re talking about networks, we’re talking about people. And adding a bunch of people in, I don’t know, some random country does not make it more valuable to me because it turns out when you connect with more people, when you expand the network, the value of each linkage is not equal. That’s the problem with Moore’s law. It’s it assumes that as you add more people to the network, the number of linkages connections to other people goes up exponentially. So the value goes up exponentially. No, that assumes that all the linkages have equal value to the user and they don’t. One of the reasons WhatsApp took off like a rocket ship is because they didn’t connect you with tons of people around the world that you could call and text. They connected you to your family. WhatsApp had basically a series of small networks where you would join WhatsApp and they would connect you with friends and family. Well those linkages and connections are far more valuable than random linkages to everybody in the phone book. And one of the reasons they call that clustering, if you want to look at network effects they talk, they look for the clustering coefficient. I think Reddit has a clustering coefficient. I think when you connect me, not with everybody, if you’re going to connect people in a social network, which is Facebook, the more I know someone, the more valuable it is to me, as opposed to random people. Well, if Reddit is not a social network. Reddit is a network based on interests. The more you connect people with me with people that have my same interests, like motorcycles in Southeast Asia, those people are much more valuable to me. So you’re basically seeing, you could call it small network effects, you could call it small network effects, you could call it increased clustering phenomena. I mean, Reddit is not really a big network. Reddit is a series of clusters that are all connected. There’s a lot of density in the smaller clusters, which we call subreddits. So that’s actually a really, when you measure network effects, you actually look for clustering because it’s very powerful. And that’s how WhatsApp really, when you measure network effects, you actually look for clustering because it’s very powerful. And that’s how WhatsApp, before WhatsApp connected everybody, it connected small groups of people to each other that were highly valuable. Before Facebook connected everyone in the world, it connected everyone at Harvard because if you were at Harvard, those connections were more valuable to you. They also call this micro-markets, but it’s network clustering. Anyways, that, I think, is a very cool strategy lesson for Reddit. Number one, the differentiation in user interest is important in these audience builder platforms. Number two, you can call this many network effects, you could call Reddit a series of clusters within a larger network, which kind of reminds me of WhatsApp, which took off faster than any network in history was WhatsApp. That was, people cite that as the fastest network effect anyone’s ever seen, measured. And it’s kind of so that, I think. Okay, last little strategy lesson, community. I talk a lot about community. There’s always every business we look at, if you look at the risk section, the first thing in every risk section is the biggest risk to our business is users and engagement. If our users in engagement do not grow or they start to fall that is a risk to the entire business. It’s almost always the first risk list in every 10k of every digital business. Because getting users and keeping them engaged is getting harder and harder. You have to spend more and more money engaged is getting harder and harder. You have to spend more and more money, there’s more and more options. We would live in a world of endless supply. It’s the idea that nobody’s getting married, everyone is just dating forever because there’s so many options. That’s kind of what’s happening with digital apps. So what I talk a lot with companies about is, look, you have to have an acquisition strategy for customers and you have to have an engagement strategy for customers but as important as you have to have a retention strategy. Because if you are only losing 3 to 5% of your users every quarter the first two problems get much much easier. If you’re losing 10, 20% of your users every quarter, and you basically lose half of your user base every year, your customer acquisition and your customer engagement question is 10 times harder. And you don’t have a lot of control over user engagement and acquisition, you have to do marketing, you have to do things. You have a lot of control over retention. If they’re on your site and you have relationships, you can really do things that improve the retention and that fewer people leave and there’s less churn. I would almost say retention strategy is more important than acquisition strategy at this point. Okay, within retention strategy, the single most powerful thing you can do, a lot of people do membership programs. They do switching costs. All that’s good. The biggest single lever you can pull in a retention strategy is community. If you can build a community, people stay forever. It’s, I mean, it’s just fantastic. And the net result is the marketing spend you will have to do to get new customers will fall. The amount of data you get and require will fall. It makes your entire life easier if you have good retention community is not to offend anybody, but Church is a community activity people go every week and they meet together and they talk and they are in groups online that is a very powerful community. A lot of religions are very powerful communities and now that’s a religious version. You could look at business examples. Groups like Nike has a great community strategy where they create running clubs for people who like to run and they come and they do runs together on the weekends. And you track your and usually communities are based on two things. To get a vibrant community, you need the users to do things for each other that the business does not do. It can’t be the business pumping out content. It has to be users creating content and sharing it with each other. It has to be users doing activities with each other online or offline. That is how you get an active community. And if you do that, people stay. And for multiple reasons, you start to have relationships. The most powerful types of communities, people share content and they do activities together. And it starts to become part of their identity. I’m an environmental activist. I’m a Christian. I’m part of the motorcycle group of Southeast Asia and we have meetups every three months. And it becomes part of your identity. And that is very powerful. So I mean, if you can build communities digitally, that’s the biggest superpower you can pretty much have these days. Anyways, think about that one, but that definitely jumped out at me that I think the community aspect is big. So that was the biggest number I was looking for in Reddit’s filings. They gave me the DAU versus MAU numbers, which is engagement. I wanted to know their retention and their churn and their cohort analysis. I didn’t see it in the filing. I don’t think they’ve published it. A lot of companies don’t publish that, which is really annoying because it’s like the most important thing. Cohort analysis is huge. Okay, that is pretty much the content for today. I know I’ve sort of blown out my 30-minute rule on this one. Sorry about that. But there was a lot here. And I think there’s three good strategy concepts you should know. I’ll put those in the concept library. And I think that’s a decent breakdown of this business model. I’ll put a graphic together for that. Last thing I had on my list for today was red flags. Let me do this without being too much of a jerk. Okay, let’s go into some sort of red flags and we’ll call these questions. I really don’t like to throw stones at companies that are dealing with issues ’cause, you know, it’s, most companies are, most companies are struggling with something. It could be something in one business division that’s, you know, in decline and we don’t know why. It could be that the overall growth of the company has stagnated or is falling. It could be facing major disruption. You’re a retailer and suddenly the Z-commerce company is coming in. And I am actually like one, that’s what I do for a living. I am sort of the person that people call in that scenario, kind of like a little bit of a doctor. Now, we’re having trouble with this. We’re worried about it. This is a major issue. We don’t totally know what a doctor. We’re having trouble with this. We’re worried about it. This is a major issue. We don’t totally know what to do. We need to talk to somebody. That’s kind of what I do for a living. And I come out of a background of turnaround. I used to be the guy that would be set into companies that were struggling with something and sort of figure out what to do. And that could be everything from complete turnaround to spin off something to merge something up. When companies are often so much of the time we talk about these rock and roll companies that are digital giants and doing well, that’s such a rare exception. Most companies are not that. They got some good stuff going on. They got some stuff they’re worried about. Anyways, I, you know, so when a company has sort of questions, which I think Reddit does, I’m always sort of very sympathetic to the executives. And, you know, I try and help. That’s actually, I get, I like that when they pick up the phone and call me and say, let’s just talk about what we’re going through here. You have any thoughts? Anyway, so that said, here’s some sort of things I noted down as I was going through it. I don’t understand what’s been going on with the staffing for the last couple years. Going from 1300 to 1900 employees 2021 to 2022, that’s crazy to me. But to be fair, a lot of the tech companies like surged their employment over the last five years. I mean, it was crazy. It was everywhere. It was Latin America. It was Southeast Asia. It was in the US. They all were on a hiring frenzy. So, okay. There’s a, that jump, they had a, their DAU over their MAU, which is sort of their daily users divided by their monthly users, which gives you assessment of engagement. It really jumped in the last couple quarters. I’m not sure what that’s about. Maybe it was marketing span. Maybe it was a pre IPO thing. Maybe it was the Google deal. You know, if that Google deal where Google is licensing their data for their LLMs, if that has gotten them preferential treatment in the search algorithm, dude, good job. Good job. That’s like making a deal with the referee and you’re in a game. Like that’s really great if you can pull that off. That was one. There was a purchase commitment. If you look at long term, I always like the risk section. I look at the risk section. The other section I like is the long term commitments under their long term commitments there’s a 380 million dollar purchase commitment I wasn’t sure what that was about that one got a little thing they got a lot of cash and marketable securities on their balance sheet 1.2 billion dollars You know, $800 to $900 million of revenue, no debt. I mean, their balance sheet is really pretty in that regard. It’s super asset light. But they got $1.2 billion of cash and marketable securities and other things. That’s, I didn’t quite understand what that was about. 50% of their revenue is going to R&D. I think a lot of people have questions on what that is. You go online, you can see that. Ultimately, I kind of made a joke about this in the title. It’s not that complicated of a business model. So things like that, I just didn’t understand what they were. Now, what are the… Okay, so those would be my questions. What are the major concerns going forward? Growth is number one, monetization is number two. The beauty of this business model, if they can monetize effectively and they can show any sort of growth, 10%, 20%. This thing is a cash machine. I mean, it’s just a digital creature. I mean, it’s a beautiful business model if they can. And it does work. I mean, yes, they’re showing negative operating profits, but there’s cash there. So it is potentially a really profitable business model. Anyways, that’s where I sort of fall on this one. I know I went way over my normal limit to today, but yeah, I’m gonna write more up about this for the subs. And we’ll, yeah, we’ll go into there. Pretty cool, I think, pretty interesting. And it’ll be in the news a lot over the next couple months, so yeah. Pretty good as I know, that is it for me for today. Sorry for going over. I’m not sure how to keep these company deep dives to 30 minutes. I seem to be pushing it. Let’s see, any fun stuff? One thing, I’ve been watching the new Netflix special Avatar, The Last Airbender. It’s pretty great. It’s pretty great. I mean, for those of you who, you know, are fans of sort of the cartoon, not the terrible movie they made, but the the Avatar, you know, cartoon from 15, 20 years ago, it’s a lot like the cartoon. And it’s very, it’s beautiful to watch. I mean, it’s absolutely fantastic visually. And they’ve kept sort of the spirit of the cartoon. So it’s a bit like watching a cartoon, you know, but it’s yeah, I’m really kind of enjoying that. And the only other thing I discovered this morning that my favorite artist of all-time Billy Joel, who stopped making songs 30 years ago, released his first song in 30 years a couple weeks ago, 10 days ago. Maybe February 1st. That was amazing. Like I used to go to Billy Joel concerts all the time in the 90s. I bet I went to 10 concerts, you know, because I play piano so Billy Joel is kind of, you know, one of the guys you follow. And then he just stopped and for 30 years he didn’t release a single song. Well, he put one out a couple weeks ago and it’s pretty great. Watch the video. Don’t listen to it online. If you watch the video, it’s about, I mean, it’s basically about a middle-aged, well, he’s an old man now, but it’s about getting older in life. And the way they did the video is they use generative AI to have younger versions of himself singing the song and as the video goes on it goes from young Billy Joel at 20 to 30 to 40 to now an old man. It’s pretty great. Anyways I like that one because I was such a huge fan. I couldn’t believe it when I read that. Anyways that’s it for me. I hope this is helpful and I will talk to you next week. Bye-bye.


I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

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