Google is the most significant risk to Reddit

Google is the most significant risk to Reddit.

Has Reddit become too dependent on Google’s traffic and money as it prepares for its IPO?

Happy Friday. Reddit’s long-awaited IPO was the biggest tech news of this week, aside from Google’s Gemini fiasco. Reddit’s most significant risk factor and the fascinating relationship between Sam Altman and Reddit are discussed.

The first thing I did upon opening Reddit’s IPO paperwork on Thursday was press Command + F on my keyboard and type “Google.”

Reddit’s dependence on Google may be the most significant risk to its viability as a public company. You’d have to look hard to find the management acknowledging this uncomfortable truth in the hundreds of pages they published about the company this week.

Reddit’s first and foremost reliance on Google is traffic. I was told by Reddit staff that they began to notice a sudden increase in users around August last year after Google changed its search algorithm. Reddit’s IPO document clarifies that user growth has been flat, at 5-7% per quarter since 2021. After Google’s changes took effect in mid-2023, Reddit users increased dramatically. The year ended with a 27 percent increase.

Another Google update could affect Reddit’s growth if it can gain so much from the change. Reddit declined to comment on this story, citing its quiet period ahead of its IPO.

Two people who know the situation confirm that Google’s gravy train is still going. According to internal metrics that I’ve seen, the first quarter this year will be another record-breaking one for Reddit users. With over an entire month remaining in Q1, the number is already above projections. This quarter’s growth comes primarily from users who are not logged in, which is a sign that the traffic is being driven by search.

Reddit stated in its S-1 that its user growth was due to the “traction” in its growth strategies. This included product enhancements, third-party search engines, and algorithm changes. Reddit also improved its site’s performance, making it easier for Google to crawl. The IPO documents don’t mention the mysterious Google algorithm.

If I were a professional investor or a power user considering investing in Reddit’s IPO, I would be interested to know how much traffic it gets from Google. The S-1 does not break out the traffic sources. I have a vague figure, but I understand that Google is the second largest source, followed by direct visits to Reddit. Other sources of traffic are below 1 percent.

Reddit used Google as a proxy for “direct” traffic. Reddit states in its S-1 that it relies on Google and other internet search engines to drive traffic to its website. This is done primarily by organic or free searches. There, “Such as” is working hard.

Google’s ability to display Reddit results is beneficial, but Reddit’s greater dependence on Google for traffic raises essential questions. What happens if Google increasingly focuses on generative AI and more people consume Reddit through a large-language model instead of the traditional search engine, with Google’s increasing reliance on generative AI? Is $60,000,000 a year worth the investment?

This brings me to my second point about Reddit’s dependence on Google. Reddit’s recent agreement with Google to use its data to train AI was revealed just hours before the IPO documents were published. Reddit is now dependent on Google to make money.

Of course, you won’t find this exact information in either company’s press release. It’s not uncommon for companies that make foundational AI models reluctant to discuss their training data. Reddit managed to mention in its S-1 document that the contract was valued at up to $203 million over three years. $66.4 million of this amount will be paid this year.

It’s not as if Google’s money will make or break Reddit. $66 million represents less than one-eighth of Reddit’s revenue last year. It’s still enough money to indicate that Reddit is increasingly dependent on Google, for good or bad.

The Altman Connection

The fact that Sam Altman is the third-largest shareholder fascinates me. Altman owns more super-voting stock than Huffman, even though the Newhouse family is technically the largest shareholder.

How did this happen? Altman has a long history with Reddit, which is widely known now. He also led a public $50 million investment round back in 2014. It has yet to be reported that Altman was given more stock for helping Huffman return as CEO in 2015. Around this time, a nonprofit startup named OpenAI started using Reddit data for free to train their models.

Altman left the board of Reddit in 2022 without giving any reason for his departure. This was at a time when ChatGPT began to gain popularity. Reddit wants to make more deals with data licensing companies like the one it made with Google. Will OpenAI pay, or is that deal over?

Notebook

Notes on other tech news:

  • A report on Sam Altman’s chip project. Speaking of Altman, during an interview with Intel CEO Pat Gelsinger, he responded to recent reports stating that he was trying to raise billions of dollars for AI chips. It wasn’t broadcast, but someone from the audience shared a chat recording: “I think that the world will need a lot more AI computing… We want to look at this if there is a way to assist with it.” It’s still very early for us.”
  • Message from an anonymous Google employee following the company’s Gemini Diversity scandal: “I can say that there has been no discussion of this fiasco in any open channels, including the internal memes page where such blunders constantly roast the executives. It’s either that the ranks are afraid to speak out, or they are being censored.
  • His underlings saved Elon Musk. One of the most dramatic changes of Musk’s Twitter Takeover was inviting Bari Weiss and Matt Taibbi to “report the Twitter Files” through internal documents. During this period, Twitter risked breaking its consent order to the FTC. This could have resulted in catastrophic fines. FTC Chair Lina K. Khan stated in a letter sent to Rep. Jim Jordan this week that after Musk instructed outsiders to “full-access to everything,” longtime Twitter information security employees intervened to mitigate risks.

People moves

Recent career trends I’ve observed:

  • Jim Fan is creating an AI research group at Nvidia focusing on AI agents. “We believe we will live in a world where robots and simulated AI agents will be just as common as iPhones.” We are developing the Foundation Agent, a general-purpose AI that can learn to behave skillfully across many worlds – virtual and real.
  • Nextdoor’s co-founder Nirav Tila has returned as CEO, replacing Sarah Friar. He’s got his work cut out!
  • X continues to lose senior sales leaders with long tenure. This time, it’s Rob DeHuff, who managed relationships for top advertisers, and Mark Bambury, the vertical lead in tech, telecom, and gaming advertisers.
  • Jennifer Prenner is Rivian’s new Vice President of Marketing. She was Meta’s former Global VP for Reality Labs.
  • Greg Solano returns to Yuga Labs as CEO and posts his goals in X.
  • Bumble has hired a new executive team of Antoine Leblond and Ali Rayl.
  • Tom Ochinero, SpaceX’s Senior Vice President of Commercial Business, resigned in 2010 after more than a decade for reportedly familial reasons.
  • Paul Hourican is leaving.

Interesting links

That’s it for this issue. I’m moderating a morning panel on investing in generative AI at the Upfront Summit in LA next week. I’d love to say hi if you’ll be there, too.

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