Reddit followed Goodwill’s playbook. Now Redditors are on strike.

WASHINGTON – – Something fascinating is happening at Reddit: The social media site’s moderators have essentially gone on strike. On Monday, they took thousands of the site’s forums private, creating an effective blackout of some of its most popular discussion boards.

I won’t dwell on why they’ve done this, because it involves no dispute of general interest such as steamy affairs, wild financial shenanigans or hot-button culture-war beefs. Instead, the fight is over whether (and how much) third-party app developers should be charged to hook into Reddit’s back end. Unlike sex scandals and culture-war battles, this question is absolutely central to Reddit’s business model, and things are not going well.

The dispute has escalated past the leaked-internal-memo phase of the corporate crisis cycle and into the backlash-to-the-memo phase – in which the problem worsens as some of the Reddit moderators, outraged by the chief executive’s dismissive tone, extend their strike. In corporate America, the next stop on this train is often the groveling public apology, followed by defenestration of some senior executive, quite possibly the CEO.

But unless you’re an avid Redditor, the reason for the fight is probably less interesting than who is waging it – because Reddit relies on volunteer moderators who are estimated to provide millions of dollars’ worth of free labor. By withholding that labor, they are not just protesting corporate overreach but also vividly demonstrating the risky strategy at the core of every social media business.

You can imagine Reddit’s business model as a kind of giant digital Goodwill store. Citizens with surplus time, ideas or complaints about the state of the world periodically stop by to donate things. At Reddit, volunteers sort through them, toss out the stuff that’s truly gross and put the rest on display for customers to browse. If all goes well, this activity generates funds – Goodwill literally sells the goods, while Reddit sells advertising, subscriptions and virtual goods – enough to cover operating costs and then some.

And this is a great business – the cost of goods sold is literally nothing! Even if the quality is, ahem, variable. Besides, large groups of people beavering away in their spare time can do a lot of things that traditional media can’t, from creating deep, supportive communities to hosting insanely detailed expert debates.

The only problem with being in the virtual Goodwill business is that you are so dependent on actual goodwill. We give charities our stuff because it gives us a tax deduction, sure, but even more because it gives us a warm feeling of having contributed to others. And, of course, the volunteers who sort and stack and sell are entirely interested in doing some good for the world. (Goodwill employs paid workers as well as volunteers.)

All of which makes this kind of business uniquely vulnerable to negativity. Every company faces the risk that their workers will organize a work stoppage or their customers will desert them. But if you try the Goodwill gambit, you face an additional threat: make people mad, and your product may go on strike. Which will, of course, make it harder to retain your customers and all the rest.

Reddit faces an extreme version of this problem, because it relies on community moderation as well as user-generated content. But every social media company is in the business of selling donated goods, which means they also face some risk that their power users will revolt.

One way to manage this risk is to grow goodwill by encouraging people to think of you as closer to an actual Goodwill store – a public service rather than a grubby profit machine. Talk about “community” and “digital town squares” and “building relationships” and “creators,” not customers and revenue and content. But that might only make the problem bigger if users come to expect you to actually operate like a charity.

Last week, CEO Steve Huffman tried to contain the damage by taking questions from Redditors. It became another chapter in what Barron’s recently called the company’s long struggle “with user backlash in efforts to monetize its reach.”

“How do you address the concerns of users who feel that Reddit has become increasingly profit-driven and less focused on community engagement?” asked one of the less fiery questions.

Huffman mildly replied, “We’ll continue to be profit-driven until profits arrive.”

Though Huffman’s critics make some good points, so does he: In the long run, adequate revenue is a prerequisite for Reddit. Unfortunately, Reddit’s user base has never needed to face this reality, because for a long time venture capital money was flowing so freely that a lot of their beneficiaries practically were charities. Reddit sopped up some $1.3 billion of that easy money over 10 rounds.

This game was too good to last, and it didn’t. Now Huffman, like many other chief executives, has to figure out how to guide the company to profitability – without destroying the goodwill goods that are his only real asset.

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Follow Megan McArdle on Twitter, @asymmetricinfo.