What’s with social media companies trying to destroy themselves recently? ( kbin.social )

tal , 11 months ago

The way a lot of dot-com startups work, they have high fixed costs -- stuff you pay no matter how many users you have, like programmers -- and low marginal costs, stuff you pay based on how many users you have.

That means that it's good to be big, because you can spread those fixed costs over many, many users. One programmer writing software used by five hundred million users can make a lot more money than software used by five users. The resulting effect is called economy of scale.

So the typical model is to take in a lot of investor money, operate at a loss, and lose money while offering a very compelling service to grow the userbase as quickly as possible.

Once you're big enough, you can spread your costs around many users, so it's easier to make money. You switch from growing your userbase to making money from it. Because you aren't trying as hard as possible to draw in new users, the service is probably gonna get worse from a user standpoint.

If money becomes tight, then it's harder to get investor dollars to operate at a loss with to grow userbase.

My understanding is that due to elevated interest rates in the post-COVID-19 situation, it's more-costly to get investment money. So that will tend to push companies from the "growth" phase to the "monetization" phase.

That affects a bunch of companies, including Reddit.

GataZapata , 11 months ago

Excellent writeup

Steeltooth493 , 11 months ago

"That means that it's good to be big, because you can spread those fixed costs over many, many users. One programmer writing software used by five hundred million users can make a lot more money than software used by five users. So the typical model is to take in a lot of investor money, operate at a loss, and lose money while offering a very compelling service to grow the userbase as quickly as possible.
Once you're big enough, you can spread your costs around many users, so it's easier to make money. You switch from growing your userbase to making money from it. Because you aren't trying as hard as possible to draw in new users, the service is probably gonna get worse from a user standpoint."

This kind of reminds me of how Legos are made. Creating the plastic molds from a molding machine to make a single Lego is extremely expensive, but if you make millions of Legos in mass production it reduces costs to make them dramatically to a point where the Lego Group has basically no operating costs to make them anymore. That turns Legos into an investor's dream.

paper_clip , 11 months ago

if you make millions of Legos in mass production it reduces costs to make them dramatically to a point where the Lego Group has basically no operating costs to make them anymore

That's how economies of scale work in general, across many, many industries.

On a somewhat related note, your Lego example is more gloriously intricate than you may realize. So, you're spend a lot of money to make a machine to produce Legos at close to zero cost. What happens if someone the next city over thinks they can make a better machine and undercut you?

One way to protect yourself is with the law. You set up intellectual property protection for your Legos and sue everyone who makes "Lehos". This works for a while.

But problems come up. Intellectual property protections have a time limit. They also have a jurisdiction limit, as some guys in a different country, say, Xhina, don't respect your country's laws and start making those Lehos.

What do you do? How does your company survive?

Well, you can leverage the other valuable part of your company, the brand reputation, to do things that Lehos can't, like make deals with other intellectual property holders to make themed Lego sets. So, you strike deals with Disney to make Star Wars and MCU sets, with Warner Brothers for those Harry Potter designs, with Microsoft/Mojang for Minecraft Legos (because they're a perfect fit). That's something that some random plastic injection mold company in China can't do. You're motherfucking Legos, not dipshit Lehos. You can do that, as well as open company stores and theme parks that are tourist destinations.

So, Legos survives, and not just that, but prospers.

Pandantic , 11 months ago

Then why they so expensive tho?

Montagge , 11 months ago

Greed

DeepFriedDresden , 11 months ago

Actual Legos are fairly cheap. You can get a box of 790 for $60, which is like $0.07 per Lego. The expensive sets are the licensed sets. They pay for that licensing fee somewhere. A Star Wars themed republic fighter tank is $40 with 262 pieces, which comes to about $0.15 per piece.

Definitely some greed in there but when you're a recognized brand with the ability to license you can get away with that because you already have the contracts so nobody can compete.

fearout , 11 months ago

This is a great write up, but what I don’t get is why do these companies stick to these idiotic measures instead of turning to their users for help in an open dialogue.

Like, I get that Reddit needs to make profit, and I actually wouldn’t have minded paying for Reddit premium to use my api key with Apollo. Instead Reddit made me and I’d guess a lot of people like me leave and never want to return. Just left with a lingering bitter aftertaste.

Did they think that they wouldn’t get enough funding that way? Well then how about giving it a test run to see if it works? Didn’t work? Well how about asking your users what they might be missing and what they might want to be more happy to subscribe, and adding features/addressing those issues? Working with developers to establish a revenue sharing agreement? There were so many alternative paths.

No, apparently nfts and shitting on your users is where it’s at.

Have a conversation, run polls, A/B test, etc. And be transparent while you’re doing it. These tools are nothing new when developing a service. Why ignore everything?

I mean, is it really just a competence/arrogance thing alone?

sailsperson , 11 months ago

I think it's more of an ego thing. The people with healthy egos probably never end up as execs in companies as big as Reddit, and the people that do are likely driven by something else other than the desire to actually build a platform that respects its users and works well in cooperation with them - "I'm smart, I'm sexy, I know better than these plebs making us money".

blivet , 11 months ago (edited 11 months ago)

Yeah, there seems to be an inflection point in the lifecycle of businesses nowadays where the leadership loses any interest in what the company actually does. The products it makes or services it provides are considered almost irrelevant.

Duskfox OP , 11 months ago

Exactly this. Companies like Reddit these days are so disconnected with their userbase it's insane. Of all the millions of things Reddit could do to make their platform a better place, they choose to basically remove the services that everyone liked (the 3rd party apps) and not only that, lie to their users (as with the case of Apollo "blackmailing Reddit for $10 million") and double down on them. It sickens me how ignorant they can be, but I guess that the hard lesson we can all take away is that with money and power comes corruption.

Have a conversation, run polls, A/B test, etc. And be transparent while you’re doing it. These tools are nothing new when developing a service. Why ignore everything?

I mean, based on how dramatic the increasing in price the API was, I wouldn't be surprised if Reddit already knew what the public reaction would be, considering they'll probably also receive considerable hate for even contemplating the decision. Of course they just didn't give a second thought and just went with it.

cheeseOnBread , 11 months ago

I stopped using reddit after spez's AmA. If all of this would have been handled in a more mature and open way, I would probably have moved to the reddit app, complained about it for a while, but kept usind reddit. But after what happened in the last weeks, reddit is no longer something I want to be associated with.
For lack of a better description, I simply don't 'like' reddit anymore. It's like a friend who treated you like shit.. Sure, you could still go to a party together and have fun, but it's just not quite the same anymore.

It's not so much about what they did, most people understand reddit has to make money at some point. It's the how that is driving people away imho. At least it is for me.

Pandantic , 11 months ago

considering they'll probably also receive considerable hate for even contemplating the decision.

Honestly, when Christian first brought up “maybe subscriptions for Apollo to offset API costs,” I was fine with that. I get that we were receiving a service for free that cost the company money, and I was fine with paying a reasonable amount for that. I just don’t get why they had to make the costs so unreasonable that even subscription based wouldn’t cut it.

Otome-chan , 11 months ago

I mean after the whole "spez shadow-edited someone else's comment to put words in their mouth" thing, what you're describing sounds a bit too ethical for reddit as a company.

ExistentialOverloadMonkey , 11 months ago

This is not true in most cases.
It's not about being profitable, it's about always making more and more and more and more - the so-called growth.

Let's take the case of reddit inc. Their revenue grew from just $25 million in 2016 to over $500 million in 2022. If they can't make a profit with that, I don't know what to say (I'd say the leadership buys a new ferrari every month, probably).
According to this thread, reddit operating costs were around $35k dollars back in 2011. Even if you were to multiply that by a factor of 10, it's still just a couple million dollars per year. Multiply it by 100, and still
They. Are. Fucking. Profitable. As. Fuck.

No, the problem is not profitability and paying the bills. Fuck no. The problem is them wanting more than what is remotely reasonable, and of u/spez being a greedy fucking pig and wanting not simply a big, but instead a spectacular cashout in their coming IPO. Well, fuck the greedy little pig boy and fuck reddit.

Balssh , 11 months ago

Basically late-stage capitalism

ExistentialOverloadMonkey , 11 months ago

Aye.

Stormy404 , 11 months ago

bingo.

FaceDeer , 11 months ago

For some reason Reddit has 2000 employees. That's a huge expense. If I were in charge of Reddit, I think the first thing I'd be doing is conducting those "Exactly what would you say you do here" interviews and figuring out why something that should be a relatively simple and mature forum website needs so many people working on it.

tal , 11 months ago

Lemme add a bit more to my above comment.

Social media companies are especially doing this whiplash switch from aiming for growing the userbase to making money. And for them, there is another factor that makes it even more important to use money for growth when it is available -- network effect. Basically, for certain services, the role of the service is to facilitate communication between their users. While it's not quite true that all users are equally-likely to communicate with each other -- an elderly user who only speaks Italian and a schoolboy in Kansas who only speaks English might not have a lot of desire to communicate -- in general, users of the service get their value from the service by communicating with each other and each additional user is one more person with whom a user can communicate. This means that it's much more-desirable to use a service with a large userbase than one with a small one, because you can communicate with others. The value of the service as a whole, if everyone were equally likely to communicate with everyone else, rises roughly as the square of the number of users. That's because the value to each user is proportional to the number of users that they can talk to, and that is true for every user -- multiply one by the other, and the value of the service as a whole is proportional to the square of the userbase size.

Social media work by connecting members of their userbase. So for them, they have a huge incentive to use money for growth whenever they can get a hold of it as far as they can.

The services that are especially likely to respond to capital being cheaply available are companies that have a business model that does this, even moreso than a typical dot-com. And sure enough -- Twitter, Reddit, and YouTube derive their value from connecting members of their userbase, rely on network effect as well as economies of scale. And just as they dive really deeply into spending cheap money to grow when they could, when money ceases to be really cheaply available, so they will have further to swim out when it ceases to be.

Madison_rogue , 11 months ago

My understanding is that due to elevated interest rates in the post-COVID-19 situation, it's more-costly to get investment money. So that will tend to push companies from the "growth" phase to the "monetization" phase.

This is basic economics. Increased interest rates mean companies will pay more for every dollar they borrow. This includes venture capital. Cheap borrowing is one of the reasons real estate values skyrocketed over the course of the past generation. Cheap money increased demand, and inflated costs. Do this long enough (maybe an economic collapse or recession between), and the house you bought in 1980 for $50k is now worth $400k.

Every company utilizes borrowing a lot more than you might think. From infrastructure, to payroll, borrowing money plays part in most activities of a company. It's pretty complex.