The $60 Million Deal Shaping the Future of AI: Inside Reddit and Google's Partnership

It's February 24, 2024. For years now, AI models have been scraping internet data, learning from it, and then delivering this knowledge through chatbots like ChatGPT or Gemini, thus bypassing content creators and undermining their efforts. As content creators find themselves increasingly marginalized, AI companies, including OpenAI and Google, appear largely indifferent. They are willing to pay for data through licensing agreements as they navigate a flood of lawsuits, but they are not backing down. They have their own fight. Their focus is on outdoing each other to emerge as the top name in the AI industry. Many content creators have already turned to data licensing agreements with AI companies, threatened by chatbots and Google's new Search Generative Experience (SGE).

In this well-known context, a significant event recently took place. A few days ago, Reddit, a social media giant, announced a $60 million-a-year deal with Google, allowing Google to use their data for training AI models. While this may appear to be a standard data licensing agreement, it prompts a series of important inquiries, central among them: How can this deal help Google win the ultimate battle in the AI industry? But, let's start from the beginning.

Reddit's IPO Journey

With over 100,000 active communities and a billion cumulative posts, Reddit, often called 'the front page of the internet' and recognized as a major hub for online communities, has decided to go public this year. Despite experiencing growth in both its user base and content, the platform has yet to solve its profitability issues ahead of its IPO valuation to secure a more favorable IPO price. Its net loss last year amounted to $90.8 million.

They previously announced striking a deal valued at $203 million for data licensing at the start of this year, which will surely enhance their profitability.

In January 2024, we entered into certain data licensing arrangements with an aggregate contract value of $203 million and terms ranging from two to three years. We expect a minimum of $66.4 million of revenue to be recognized during the year ending December 31, 2024 and the remaining thereafter.

The specifics of the partner in the deal have not been disclosed. Nevertheless, given Reddit's recent official announcement of a $60 million agreement with Google, it's strongly presumed that Google is the entity in question. Moreover, there's considerable speculation about OpenAI's involvement in the agreement, particularly due to Sam Altman's role as Reddit's third-largest shareholder.

$60M Google Pact

Based on what has been shared, Reddit will gain access to Google's machine learning platform, Vertex AI, an all-in-one solution for executing machine learning tasks. Additionally, they will receive $60 million annually, as previously noted. Google, in turn, will be granted access to Reddit's Data API. This access will be utilized, according to their statements, to enhance the integration and visibility of Reddit's data across Google's products:

Over the years, we’ve seen that people increasingly use Google to search for helpful content on Reddit to find product recommendations, travel advice and much more. We know people find this information useful, so we’re developing ways to make it even easier to access across Google products. This partnership will facilitate more content-forward displays of Reddit information that will make our products more helpful for our users and make it easier to participate in Reddit communities and conversations.

Taking a closer look, it's obvious that Google making Reddit's content more searchable across its services really works out for Reddit. While the full picture isn't clear yet, such enhancements are likely to help Reddit strengthen its position in the ad market.

Google's Advantage?

We all know that. The gold of today. The data. But isn't Reddit's data public? Well, it was, and Google has been utilizing this data for training their AI models for years. Previously, Reddit allowed open access to its data. However, last year marked a change in direction. Reddit decided its data should no longer be provided for free to the world's largest corporations.

Now, major companies must enter into licensing agreements to access specific datasets. While the exact details of the licensed data are unknown, it's clear that Reddit's vast and varied content—from casual conversations to in-depth discussions—presents a treasure trove for AI model training. This data offers immense possibilities for enhancing AI capabilities and here's a list of potential use cases:

• Sentiment Analysis: Utilizing upvotes, downvotes, and comments to gauge user sentiment on various topics.
• Refinement of Recommendation Systems: Analyzing user interests and engagement to tailor content recommendations more accurately.
• Behavioral Studies: Investigating how users interact with different types of content to understand engagement patterns and preferences.
• Natural Language Processing (NLP): Exploiting Reddit's linguistic diversity, including slang, jargon, and conversational context, to enhance AI's understanding of human language.
• Moderation Data Analysis: Using moderation logs to improve methods for detecting and moderating toxic content.

Community Impact

Regarding the true content creators, the Redditors, one might wonder if they stand to gain anything from this deal. Following last year's site-wide protests and communities going dark, triggered by alterations to its developer platform and API pricing, it's in Reddit's best interest to keep its community as content as possible. However, selling their data to a tech giant for AI model training might not align with enhancing user happiness. This is where the opportunity for Redditors to purchase shares during the IPO becomes relevant. As mentioned in the company's S-1 filing:

We are going public to advance our mission and become a stronger company. We hope going public will provide meaningful benefits to our community as well. Our users have a deep sense of ownership over the communities they create on Reddit. This sense of ownership often extends to all of Reddit. We see this in our users’ passion for their communities, their desire for Reddit to be as amazing as possible, and in their disapproval when we let them down. We want this sense of ownership to be reflected in real ownership—for our users to be our owners. Becoming a public company makes this possible. With this in mind, we are excited to invite the users and moderators who have contributed to Reddit to buy shares in our IPO, alongside our investors. Of course, we would love our investors to be users as well. Additionally, being public lets us raise capital and offer liquidity to our employees who have worked tirelessly to build Reddit. It also comes with additional disclosure obligations, which aligns with our values around transparency. Finally, to help further support the positive impact of our communities and invest in new opportunities that align with our mission, we have reserved about 1% of our common stock to fund community-related programs.

Time will tell if this is enough to appease the community and maintain Reddit's status as the king of community-driven discussions.

Final thoughts

If Reddit can keep its community content, it seems like they've scored a pretty sweet deal, even if there are some skeptics about whether the $60 million per year is fair for the data Google receives. In my opinion, they've cleverly positioned themselves for survival, which makes sense given the immense value of their data. For Google, this deal might just be a step to stay competitive in the race. Given Sam Altman's close ties with Reddit and the critical importance of Reddit's data for training AI models, I'm doubtful that OpenAI is entirely out of the loop regarding access to this data.

Time will reveal the outcome; we'll soon discover whether Reddit achieves its valuation goals and if Google advances in the AI landscape.