I don't understand why reddit didn't respond to the initial criticism by decreasing the pricing/demands and just slowly implementing what they want over time. Doing it all at once seemed like a silly move.
A paid tier lets you easily identify which of your users have disposable income, and then you can sell the ability to advertise to them at a huge premium.
Spotify's advertisements are quite different because they're basically worthless. Nobody wants to pay money to advertise to broke people. Their free tier exists merely as a funnel; the advertisements function as intentional annoyances to nudge people into paying for a subscription.
And now they're running the risk of getting 5% the revenue.
* No actual numbers were harmed in the making of this post.
Also running a paid API service actually requires providing services to the third parties that are using them (like billing dashboards, etc).
I'm pretty sure they didn't really think this through entirely when they proposed it. Now that they kind of have a better idea of what they're getting into doubling down is just hubris.