The Dismantling of Digg
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Tech news sites lit up last week when it was reported that social content site Digg, once a digital wunderkind with a valuation around $160 million, had sold to NYC tech firm Betaworks for the bargain basement price of $500,000. While that price is reportedly accurate, it isn’t the full story. The dismantling and demise of Digg should serve as a lesson to other startups that lack a strong monetization method and unique content. I'm looking at you, Yelp (NYSE: YELP).
A Brief History
The earliest version of Digg popped up in late 2004. The site was started by Kevin Rose, Jay Adelson, Owen Byrne, and Ron Gorodetsky using $6,000 of Rose’s money. In the following year, the site earned numerous upgrades and $2.8 million of investment money. In 2008, Digg hit an all-time high in visitors (30 million per month) and received a $28.7 million investment from Highland Capital Partners.
Two years later, Digg released an update known as Digg 4.0. It met with a wave of derision and defection from loyal users. A common user complaint was that 4.0 put sponsored posts and ads above user generated, organic content. Monthly users fell to 15 million per month by the end of 2010. That number has now fallen to 7 million per month. Seven million users per month isn’t paltry, but it’s a significant drop for a company once touted as the next big thing with a rather infamous BusinessWeek cover featuring Kevin Rose.
Digg: The Dismantling
The total sale price for Digg is much higher than $500,000. Including the Betaworks portion of the purchase, the total price is thought to be closer to $16 million. The total sale price is thought to be closer to $17 million. That includes a trio of dismantled sections sold to three different parties, with Betaworks making the cheapest purchase for the rights to Digg’s domain and code. Betaworks is thought to have paid $500,000 but only for the domain and code. The company plans to merge its new acquisition with its popular News.me social media summary service.
The larger payments were for its people and its patents.
$12 Million for Digg Team (Washington Post)
Back in May, it was announced that 15 Digg engineers had joined the team of SocialCode, a subsidiary of The Washington Post Co. (NYSE: WPO) dedicated to helping businesses use social media information as marketing research. This move was a major hint that Digg was about to go down. It is now rumored that the Post paid $12 million for that team, which would average out to $800,000 per employee. Yes, it was the purchase of employees from a company that went down hard. But that doesn’t mean those particular individuals weren’t competent workers.
$3.5 Million for Patents (LinkedIn)
According to AllThingsD, career networking site LinkedIn (NYSE: LNKD) paid a bit under $3.5 million for one patent and up to 20 patent applications. The sole awarded patent dealt with the voting method that Digg used, including both the up and down voting mechanisms and how the system recognized and sorted stories based on the user input. LinkedIn could use some of the technology to further customize its user experience, particularly since its fallout with Twitter. Or it could use the patent to pursue litigations against similarly minded social news sites such as the Conde Naste owned site Reddit, one of Digg’s main competitors.
Warning Bells?
The flop of the Facebook IPO made tech companies more conservative when it comes to listing, contrasting the IPO free-for-all that came in the pre-Facebook listing optimism. The demise of Digg should also serve as a warning to companies with weak monetization plans, strong competition, and a tendency to mishandle innovation. Yelp is a name that immediately springs to mind when considering those qualities. I've previously written about Yelp's shortcomings but investors should definitely turn a harsher eye towards Yelp now.
The winner of this dismantling is undoubtedly LinkedIn. Though it's unlikely the company will pursue patent litigations (which are rare in that sector), the technology could help enhance the LinkedIn user experience.
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