The Dollar Factory

Greylock Partners and Omidyar Network invest more money on money losing Digg

I guess the title says it all but let me elaborate a bit on the news. Basically, Digg was able to raise $8.5 million in funding from the Greylock Partners and Omidyar Network. Greylock had previously invested $2.8 million on Digg. I guess it makes sense to give Digg money to operate and grow considering that it recently became the 20th most visited US site on the World Wide Web.

However, hold on for just a second. According to TechCrunch, Digg is currently losing money, i.e., Digg is not profitable. The founders estimate that this will change soon and Digg will start having a positive cash flow. I am not so sure about that!

First of all, Digg traffic has probably reached a plateau. Do not expect Digg traffic to increase significantly in 2007 unless of course they somehow provide another service other than the user voted social news. Second, it appears that Digg makes its money from contextual advertising. Since Digg’s demographic consists mostly of young techies who religiously utilize ad blocking software such as Adblock and Falshblock, on what basis do the founders expect to make Digg profitable? A move to increase readership to other than the tech crowd will probably alienate most of the current users. Many Diggers have expressed their disappointment over Digg’s additions of non-technical news categories over the last few months.

Digg currently employs 18 people. What I don’t understand is what all these people are doing. The site was recently updated with a new look but no major features were added other than on the video section. In fact, other than paying for servers and bandwidth what does Digg need $8.5 million for? Rumor has it that they are trying to sell the property for $150 million but so far they have not been successful. Who in their right mind would buy Digg? It is next to impossible to monetize it in a way that will pay off the acquisition cost in a reasonable amount of time.

Sure Digg is nice but I don’t see it having much of a future. It is easy to create a Digg clone and it will not take much to get Diggers to move to another site if they feel that Digg is not what they want it to be. They will run away instantly from Digg if it is updated with more advertising or if it becomes a pay service. In other words, welcome to the beginning of Bubble 2.0.