The UHF-ification of the open web
“90% of a being a dad is just showing up,” Ed O'Neill as Jay Pritchett in Modern Family. Well, I did the math, and 25% of an ad is just showing up. Ad space isn’t nearly as important as we thought.
The other day — somewhat flippantly — I tossed out two numbers. Reddit gets $17 a year in ad revenue from users they know. They only get about five bucks a year from folks who just show up.
It turns out that set off a maelstrom of inbound questions. Around here, a maelstrom is anything north of one.
Why… why do users with accounts generate more revenue? What does Reddit know about me if I create an account that helps them sell higher priced ads? Does this happen at any other sites? Can I get the exact numbers?
Let’s start with the real numbers. A person with an account at Reddit is worth $17.60 in annual ad revenue to the platform. People who just show up are worth $5.90 in annual ad revenue.
A thunderous, standing up Charles Foster Kane clap for Deutsche Bank analyst Benjamin Black for those numbers. As he said to CNBC, “Reddit doesn’t break out those numbers.”
Two numbers in an analyst report doesn’t amount to a hill of beans most of the time. But these two numbers unlock and quantify an important story. $5.90 is for the ad space. The other $11.70 is for the data.
If you’re reading this and either: (a) don’t know that there’s a huge case going on in ad tech land between Google and the Department of Justice and aren’t transfixed to the nightly updates like it’s the O.J. Trial and you’re waiting to see if the gloves fit; or (b) you simply don’t care, ad space is this. You’re scrolling through a recipe for classic eggplant parm on Natasha’s Kitchen. A little ways in, a blank space appears. A moment later it’s filled with some a banner ad or video for something or the other. The space that ad filled is the ad space. Companies pay good money to put that ad there.
We think the internet is vast. It is. And, it’s not. Only about 21% of internet ad space exists on sites like Natasha’s Kitchen. The rest is inside walled gardens. Places like Facebook and Instagram and TikTok and Snap.
The walled gardens dominate our interests and time. And ad space. As recently as 2017, 32% of internet ad space lived on the open web. Today, the open web is becoming as irrelevant as UHF channels on a 1970s television. Grainy pictures and home-grown shows aren’t nearly as interesting as slick videos on major platforms chock full of big-ticket production values.
Even then, there’s a hierarchy to the open web. Sites like ESPN and the New York Times live on the upper end of the open web. You have an account on ESPN to play fantasy sports. You have a subscription to the Times. They know you. At Natasha’s Kitchen, you just show up. If there is a Natasha, she doesn’t know you.
That difference begins to answer: Why… why do users with accounts generate more revenue?
I never think to go to Natasha’s site. I get there when I google a recipe. Google puts her site at or near the top of the results. Since I’ve had some success with making bad versions of her good food, I click and get whisked away to find out how to make hollandaise sauce.
I’m transient traffic. All she knows about me is that I’m interested in this recipe. She can show me ads for food or ingredients or maybe some nice pots or pans. Endemic stuff. She has low-value space.
ESPN is a different story. I know ESPN. I remember the brand without someone prompting me. I go there without searching for something. And, they know me. That’s the start of data. That data helps them connect me to brands that think they know me. They can show me ads for a variety of things that an advertiser might believe interest me. Cars, watches, premium booze, low-end booze. Those ads are more targeted. Advertisers pay a premium to reach me.
If I click on the ad, the folks at Buick, Tag, Finlandia, or Bud can say, “Ah, user ID clicked on the ad. Let’s increase our likelihood that he’ll buy a _____ from 3% to 3.6%.” They can quantify the ad in ways advertisers can’t at Natasha’s.
Pivoting back to Reddit. About half the people that get to Reddit get there from a Google search. Reddit has no idea who they are. They’re low value users. The bad news for Reddit is that they’re not signing up. Which means Reddit only gets 25% for the ad space and doesn’t get the other 75% for data.
Media super-analyst and investor Rich Greenfield noticed this, connected it with user regularity, and asked about it on Reddit’s August earnings call. “CPM pricing is down… Is there something that you've seen historically that sort of converts somebody from either a search-based user or someone who comes in once in a while to an actual daily user?”
Reddit CEO, Steve Huffman, gave a constipated answer that should worry all open web sites, “Weeklies, and of course monthlies even more so, can be more volatile because they can be more affected by third-party search or events in the news and what have you… We don't think necessarily about how do we convert weekly to dailies.”
As a platform on the cusp of being walled garden, Reddit’s comments should make all sites on the open web shudder that they’re becoming UHF.