Digg This

Article excerpt

Byline: Daniel Lyons

A cautionary tale for Web 2.0 companies.

Four years ago Kevin Rose, the boyish, 20-something founder of Digg, was on the cover of BusinessWeek under a headline that screamed HOW THIS KID MADE $60 MILLION IN 18 MONTHS. Digg wasn't rocket science. It was just a Web site where people could vote for news stories they liked so that popular stories rose to the top. And Rose hadn't actually made $60 million. That was just what his shares in Digg would be worth based on pie-in-the-sky estimates of the company's value. "People in the know say Digg is easily worth $200 million," BusinessWeek wrote.

The problem with those "people in the know" is that Silicon Valley is filled with them, and most of them don't know all that much. Digg struggled for a few years, then swooned, and now finds itself in free fall. One year ago the site attracted 18 million unique visitors in the United States. By last month that number had plunged to 5.3 million, according to ComScore. (Digg says the figures are higher than what ComScore reports but concedes traffic has dropped.)

Rose never got his $60 million, and chances are he won't. Digg will generate about $15 million in revenue this year and still operates at a loss, estimates Michael Arrington, editor of TechCrunch, a blog that tracks Silicon Valley startups. Digg's backers would likely be willing to sell the company now for as little "as $20 million to $30 million," Arrington says. That's a bummer, since investors have pumped $40 million into this outfit since it was founded in 2004, and Rose and his backers are rumored to have had chances to sell the company for $130 million.

Digg's collapse has become a cautionary tale for so-called Web 2.0 companies in Silicon Valley, even the current crop of superstars, like Facebook and Twitter. The basic problem is that these new-media companies don't really have customers; they have audiences. Starting a company like Digg is less like building a traditional tech company (think Apple or HP) and more like launching a TV show. And perhaps, like TV shows, these companies are ephemeral in nature. People flock in for a while, then get bored and move on.

Maybe there's nothing wrong with that, especially since these companies aren't that expensive to launch, and some of them make a lot of money before they fizzle out. …