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Making money online isn't always easy, especially when you run an ad-supported business. And that's not just true for the small fries; it can be even more true for popular, heavily-trafficked sites.

That's the case for Reddit, the popular user-generated news site. It was purchased by Conde Nast Digital in 2006, but a blog post last Friday indicates that all is not well at Reddit.

The post, which is directed at Reddit users, is either refreshingly honest or disturbingly desperate, depending on your perspective. It states, in part:

The bottom line is, we need more resources.

Whenever this topic comes up on the site, someone always posts a comment about how reddit is owned by Conde Nast, a billion-dollar corporation like Time Warner or Cobra, and how if they wanted to they could hire a thousand engineers and purchase a million dollars worth of heavy iron. But here's the thing: corporations aren't run like charities. They keep separate budgets for each business line, and usually allocate resources proportionate to revenue. And reddit's revenue isn't great.

Since Conde Nast doesn't see the wisdom in giving Reddit more money, Reddit is hoping that its users will. It's asking them to donate money that can be put toward the hiring of more engineers and the purchase of more servers.

Unfortunately, Reddit is essentially asking its users to play the role of 'greater fool'. Since it apparently doesn't have the ability to build the subscriber-only features it says it would like to offer, it isn't currently providing those who pony up money with anything other than "our undying gratitude and an optional trophy on your userpage."

The problem: Reddit is clearly more focused on raising the money it 'needs' than it is on developing a service that provides value to paying customers. Perhaps Reddit's community is so loyal that the money will start pouring in regardless, but that would hardly be a long-term fix. After all, engineers add to the payroll, and the servers Reddit buys today probably won't be the last it needs.

Reddit's traffic "continues to grow by leaps and bounds", but Conde Nast isn't interested in helping Reddit hire more engineers or buy more servers. That says an awful lot about Reddit's prospects as a business and I think it's safe to say that the writing is on the wall: Reddit, in its current configuration, is in trouble.

That means it has two options: it can either find a business model that works, or it can try to survive as a charity. The former can be tough, but the latter is almost always much, much tougher. Right now, however, it appears Reddit's best hope for buying time to build a better business model will depend on the charity of its users. That won't be an easy sale. As one Reddit user commented:

I guess I fundamentally have an issue with this business model. If reddit were subscription based, then I'd probably pay. If it were a charity, then I'd donate. But it's neither, and I'm not sure propping up a failing business model is a healthy pursuit for either the users or the site. I could see this being disastrous if reddit comes to rely on donations because it's easier than reworking the business model.

There's a good lesson here for all startup entrepreneurs: business models matter -- even after you've been acquired. Resources are always finite, and if the resources you have are being invested in developing things that don't support a viable business model, there's simply no way to last. Such a misallocation of resources appears to have taken place at Reddit.

Photo credit: Teuobk via Flickr.

Patricio Robles

Published 12 July, 2010 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

2355 more posts from this author

Comments (5)

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Liam

Unbeliveable. I could see this working had it been a not-for-profit like Wikipedia (yes I know about Wikia). However it is a commercial business and if it isn't performing, then they have to rethink their business model, sell the business or even shut down the site.

almost 6 years ago

Rishi Lakhani

Rishi Lakhani, Search Strategist at Independent Consultant

@Liam You will be surprised at how much the reddit community would do to band together if closing the site was even a possibility. The site exists for the community - and I think asking for donations may still work. However it may not be the best way forward - they need to learn to monetise the site better.

almost 6 years ago

Ciaran Norris

Ciaran Norris, Chief Digital Officer at Mindshare

This is kind of embarrassing and I think Patricio has it bang on here. Reddit's owners don't think the company is worth investing in (though the question there has to be, why buy it then?) which suggests it may not have long to live, and so Reddit asks its readers for money to buy one more hit until someone puts it down in a humane manner.

Chris - dig a little into the digg comments and there actually appears to be quite a lot of understanding of the issue (and I'm no great lover of digg readers). As you say, can you imagine where digg would be if it had received the same level of investment as Reddit? It would probably be bust (ahhh, now there's a thought)

almost 6 years ago

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Robert G

I feel like Reddit management (i.e. the 4 guys than run it?) are are a bit out of their depth but there is no reason why it can't deal with their situation and get it sorted. Given their clear lack of business acumen i can see why CN don't want to pour money in, but with the right help they could become a relatively successful niche site that ticks over nicely:

- Reddit users have indicated that they would love an @reddit.com email address. Reddit's response - we used to run mail servers and we didn't like it!?! Just outsource it! The users are willing to pay for it, it won't require offering a differing core site experience for subscribers vs non and you could set it up in the space of a few days (or weeks if you want to offer a powerful service, customised, webmail etc. 

- They appear to have a real lack of ad sales expertise (they prob rely on a corporate team at CN) - in fact they keep talking about getting in a marketing director to solve this problem!! What they need is a SALES director - they don't really seem to understand how this works. A bit of in house resource could generate strong revenues given the very targeted sections of the site they have.

What do they need? I think they should offer the email service, get it running and then recruit a group up commercial team to deal with their lack of advertising performance. These two together they could be turning of a nice profit. Probably not big enough to interest CN - but it will keep the community going!

almost 6 years ago

Avatar-blank-50x50

Prescott Shibles

The trouble with Reddit is that the community is so anti-advertising. I've seen the Wikipedia concept that Liam floated discussed over on Hacker News:

http://news.ycombinator.com/item?id=1509424

The trouble is that Conde Nast spent some money on acquiring the brand. So, I don't see how the community can advocate a non-profit path forward and completely disregard the investment made. Losses on investments mean lost jobs... and not the jobs of the executives who did the deal.

almost 6 years ago

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