Reddit, AI, and advertising - the IDK IPO 🤷
What do ads look like on a human-AI hivemind?
Reddit is the strangest IPO in recent memory. Is $5B a good price target? As the best source of authentic information on the internet, it has a path to become a $1,000B juggernaut to threaten's Meta's dominance on content and Google's dominance in search. Or the pressures of a public company could drive it to destroy its product and alienate its users overnight. This feels more like evaluating a volatile startup than a 20 year old media corporation.
Here's what Reddit has going for and against it:
✅ As the best source of authentic information on the internet, it could become as valuable as META.
❌ Its ad product is years behind in terms of UX and ROAS
✅ The core product has resisted the enshittification that's undermined so much of the internet's UX since the mid 2010s...
❌ ...through a sort of salutary neglect where most R&D has gone to benign, meaningless features like NFT avatars and UI overhauls
✅ A good on-site search feature would print money with search ads. Currently Google is free-riding Reddit's content this way. LLMs + RAG on individual subreddits would be incredibly useful.
❌ Reddit has failed to develop better search and ad products for a decade. Why??
✅ The timing is excellent for an IPO cash infusion to capitalize on AI and Google's slipping search quality. The time is right to buy or partner with other search and ad platforms.
❌ Public companies suffer from short-term pressures to maximize revenue, which makes ambitious pivots harder. If Reddit couldn't execute a strategic vision as a private company, will it sell out its user experience for short-term gains post-IPO - especially with later investors looking to make their money back by the end of the lock-up period.
✅ Reddit's alienated its users before with no long-term detriment (e.g. closing its APIs). Community network effects can keep a declining product going a long time (Cf. Twitter)
The internet's source of truth
Reddit has become the de facto source of truth for most questions, evidenced by:
Reddit is heavily represented in the training corpus of most (all?) foundation models
Google's paying Reddit $180M to train their models on Reddits content. There are few things on the internet that Google can't get on its own.
Google increasingly highlights Reddit posts as a dedicated answer category in search. Perplexity allows Reddit-focused searches. Savvy users have been adding "site:reddit.com" to searches for years.
Search, LLMs, and a large chunk of journalism have become wrappers on Reddit's content.
Humanity's hivemind
Redditors have long identified as a "hivemind." ChatGPT was remarkable because it made that hivemind radically more accessible. RAG answer engines (Perplexity, You.com, Exa.ai, etc.) that can be aimed at Reddit.com are (to be reductive) an even more direct line to Reddit's content.
The next evolution consists of LLMs trained, tuned, and RAG’ing on specific subreddits – a true "mix of experts". This is a straightforward engineering problem, but as of last summer Reddit has limited access to its content to make it hard for 3rd parties to build this.
Beyond being genuinely useful, such a product would add a lot of AI hype ahead of an IPO, so it's strange that Reddit hasn't given any explicit indication of pursuing this.
Reddit did, however, redesign its logo in November 2023:
Conversation with people? Or conversation with RedditAI???
Advertising in the age of AI
AI is changing how we access knowledge, and smart people are realizing advertising in the age of AI will change too. Currently, advertising thrives in the friction between question and answer:
search ads as we look for the right link
display ads as we scroll through the source site
retargeted ads based on our browsing history as we wander the internet for answers
If the internet is like a small town where you have to wander to find what you want, AI is the superhighway that bypasses the old neighborhood. The loss of pass-through traffic will be economically devastating.
But Reddit controls the ground source of knowledge no matter how many layers of wrappers AI peels away. The challenge becomes how to design ads that deliver ROI to the advertisers that ultimately pay for it all.
Ads as information
Fundamentally, ads improve market efficiency as information signals between sellers and buyers. An ad creates value for advertisers when it impacts buyer behavior at the margin – e.g. when a Google search ad steers a ready buyer to a relevant, sponsored business.
As AI makes knowledge retrieval more efficient it raises the bar for ads to contribute marginally useful information to affect consumer behavior. To impact consumer behavior, ads need to be as smart as the content they accompany.
Google ads work because they alert us to relevant businesses to our query.
Compare that to LLMs pulling answers directly from Reddit, without the potential bias of sponsorship. In this situation, the previous Google ad's marginal information value would be negligible - why pick an advertised business over the AI's organic recommendations?
Ads on AI content have something incredible going for them, though: context. They can not only target and adapt themselves to the user's query, but answer followup questions with AIs of their own:
Multi-turn conversations with AI are even better. Google already offers suggested follow-up questions. Each lets advertisers infer more about the user and refresh a more relevant ad in response.
Advertisers have access to data beyond Reddit – ecommerce integrations, review platforms, video, social graphs, etc. The future of ads is deeper knowledge discovery. This is what Reddit should spend its $700M+ IPO fundraise on.
Reddit's choice
This is an innovator's dilemma for Reddit, Google, and other content platforms1: the more friction they remove from their products, the worse their current ads will perform.
Post-IPO is a terrifying time for Reddit to cannibalize its $500M/yr ad business – especially for executives and investors waiting for lockups to expire; but successfully integrating AI into the core product should matter more to shareholders - especially given Reddit’s massive exposure to retail investors. After all, what's $500M/yr when there's a $600B/yr digital ad industry to win?
None of this is investment advice. It’s product advice.
This won’t hurt Instagram, TikTok, Twitter, etc. They’re entertainment platforms where the desired UX is passive content consumption rather than focused knowledge retrieval. Reddit also functions as passive scrolling entertainment, but its active knowledge-retrieval use case has more untapped potential.