Digg sells to Betaworks for the fire sale price of… $500K (analysis)

Community news sharing site Digg has been acquired by Betaworks, Digg CEO Matt Williams announced today in a company blog post.

Ordinarily, this would be a good thing, especially since the company has been making a serious attempt to sell itself for the last six months or so. However, the Wall Street Journal is reporting that the sale price was a measly $500,000 — ridiculously lower than the rumored $200-$300 million it was asking back in 2008.

Four years ago, Digg was at the forefront of any public discussion on the news industry’s evolution. The site had a healthy active user base that could drive tens of thousands of visitors to any website fortunate to have a link on its front page, and special media spotlight partnerships with the likes of Al Gore and Dan Rather. But that was then, and this is now.

According to the terms of the deal, a cloud-based version of Digg will be erected and eventually integrated into Betaworks’ News.me news aggregation service. Also, Williams will be stepping down as CEO and joining Andreessen Horowitz as Entrepreneur in Residence. Most of Digg’s core engineering and management staff already moved on to the Washington Post Company in May, as VentureBeat reported. The sale comes after seemingly fruitless negotiations to sell the entire company to a number of potential publications, such as the WaPo and CNN. The deal will also see Betaworks founder John Borthwick step in as the new CEO of Digg.

“John understands the real-time nature of the web and how to capture and surface trends as they occur,” said Digg founder Kevin Rose in a statement. “Given his experience with bit.ly, news.me, and Chartbeat I can’t wait to see what he does with Digg.”

The ridiculously low purchase price likely indicates that Digg’s underlying technology wasn’t very valuable in comparison to what other news aggregation services were doing. That said, even if Betaworks wasn’t interested in Digg’s technology, it could have been swayed by the brand name. I wouldn’t be surprised if News.me eventually became “new Digg” in the near future.

How Digging for treasure turned into digging a grave

Digg’s inability to sell the company for +$200 million came down to its lack of valuable technology. Similar to Reddit, Digg’s front page was composed of user-submitted links that the community voted on. The most favorably voted submission during the course of a day hit the front page, conveniently leaving you with only the very best news. The site truly was powered by the people, but unfortunately that meant it wouldn’t be nearly as valuable to a company like Google or Microsoft.

Therefore, Digg’s most valuable asset at the peak of popularity was its die-hard user base, including about 200 (give or take) “power users” who would submit the bulk of  links that made it to the front page. This put the company in an odd position because it had a history of treating these power users as if they were a cancer that needed to be physically removed to avoid death. But even without those super-active users, Digg’s community was extremely strong back in 2008.

With the prospect of selling itself in a multimillion-dollar deal fading, Digg hired more engineers to monetize its one valuable asset beyond just traditional advertising — a concept that’s much easier said than done. In 2010, Digg revamped the site’s voting system and overall functionality, which caused a sharp drop in traffic and lots of backlash from the remaining power users. As you can imagine, this development only worsened Digg’s monetization woes.

“Digg has always had a problem with monetization,” said Muhammad Saleem, a former Digg power user and co-founder of financially focused community link sharing site Tipd. He noted that relying on advertising alone just isn’t possible for the kind of money Digg wanted to generate. “The ad-supported model is broken. There is no engagement, you’re constantly chasing pageviews, cpms and cpc’s rise and fall with little control. It’s a vicious cycle.”

Despite constant experimentation, Digg also wasn’t very successful with alternative forms of advertising/promotion, Saleem said. Things like sponsored in-stream links on the front page “didn’t offer of a great value proposition. StumbleUpon makes it work, but Digg could not.”

But this problem isn’t specific to Digg, as most sites with the community link sharing functionality have trouble making money — especially if they can’t continue growing its user base. For instance, Tipd was forced to shut down just weeks ago due to its dwindling active user base and limited ability to generate revenue. Another example is custom social network creation service Ning, which was also unable to monetize on its own. But unlike Digg and Tipd, Ning still had hundreds of active communities that hadn’t evaporated. That led to the company’s acquisition by Glam Media for $150 million nearly a year ago.

Without an active community, Saleem said he questioned if Digg was even worth the $500,000 acquisition price because most of its underlying technology can be done through open-source social media CMS (content management system) Pligg.

Top image illustration by Tom Cheredar; “Digg” War webcomic art via nComment