Reddit has long attracted millions of users to its site through Google, with many even adding the word “Reddit” to their search queries for better answers. But as search traffic dries up due to the shift to AI-powered search, Reddit is rethinking its relationship with the open Internet. On Thursday, during its third-quarter earnings conference call, the company announced that it was moving to a “predominantly connected experience.”
The move aims to protect its data from AI scraping, allowing the company to strike lucrative licensing deals with model providers. But just as importantly, such a change could help Reddit increase revenue even as it faces a daily decline in the number of active users in its largest market, the United States.
Overall, Reddit’s global daily active users remained stable quarter-over-quarter in the third quarter, reaching 130.3 million, while U.S. daily active users fell from 53.2 million in the second quarter to 50.7 million in the third quarter and declined 2% year-over-year.
The company is not alone in seeing such declines; The shift to an AI-centric web has now affected most websites and publishers, leading to a decrease in clicks as AI summaries provide answers that do not require website visits and Google’s traditional “ten blue links” have reduced relevance. (The change now even impacts Google’s results, its results revealed.)
But on a Reddit scale, the numbers associated with such a decline are enormous. The company said search traffic referrals fell by more than a million referrals on average per week in October. He warned that if the trend continues, the number of daily active users could drop to a low double-digit percentage by the next quarter. (To summarize: a hypothetical 10-12% drop could bring Reddit to around 115-117 million daily actives, down from 130.3 million in Q3. That’s a huge drop!)
At the same time, Reddit has improved significantly at monetizing its audience, although its growth is weakening. Revenue rose 53% year over year to $895 million, beating Wall Street expectations of about $875 million. Net profit increased 74% to $283 million. Advertising revenue increased 54% to $847 million, while non-advertising revenue, which includes its AI data licensing business, increased 35% year-over-year to $48 million.
And despite a 2% year-over-year decline in U.S. daily users, Reddit’s average revenue per U.S. daily active user increased 53% to $13.82. Globally, average revenue per daily active user increased 36% year-over-year to $6.87.
Shifting to a connected experience could increase these numbers further, as connected users are generally worth more to advertisers.
Unlike logged-out users who often access the site through search, logged-in users provide more signals about their interests and behaviors, allowing for better targeting and personalization of ads.
These same signals would also help Reddit provide a more personalized experience for its users, which includes personalized feeds, recommendations of new communities to subscribe to, and incentives to vote, comment, participate, and more. (This also includes sending recommendations to its new “For You” algorithmic feed, announced yesterday, which will combine posts from communities users belong to with other recommendations based on their interests.)
Yet a change of this magnitude could be the canary in the coal mine for the open web.
“I don’t know about you, but as someone whose life has been defined by the open Internet, this is a big change for me,” wrote Steve Huffman, co-founder and CEO of Reddit, in a post on Reddit’s website. “But I have come to the conclusion that this is the right decision for our platform and the right decision for our business,” he said.
The company notes that the shift to the login experience won’t happen overnight; it will first conduct testing in select markets outside the United States in the fourth quarter. There is no timeline yet as to when the change will be rolled out to all of its users worldwide. He also acknowledged that access to a disconnected home page is important.
Additionally, Reddit emphasized that being logged in does not mean having to give up anonymity nor will it remove the ability to browse anonymously through one’s “incognito mode” experience, which is currently being rebuilt.
There are still many unanswered questions, particularly around where the lines between logging in and logging out experiences should be,” Hoffman wrote. “This is a big development for Reddit, and we don’t take it lightly. But I think it’s the right next step for the platform and for our future.
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