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Digg Revenue Tripled, But “Not Profitable Yet”
Posted by Scott on 25th September, 2008 | 32 commentsI read a Fortune story yesterday about how Digg has raised $28.7M in funding, putting its total money raised at $40 million. According to the article, “Adelson says revenue from the ad-supported service tripled this year. While it is not profitable yet, it was on the path toward cash-flow break even, Adelson says. “It’s not that this round of funding was critical to getting to profitability,” he says. “Before this round we were fully-funded.”
Wow. For a wholly user-driven content, automated site, to have 224M page views a month, have triple the revenues this year over last (whatever that number is, no one knows for sure), to not be profitable, and to continue borrowing money, is absolutely insane. For as popular as Digg is, as a business, it makes our industry look bad and reminds people of the cash-burning Web 1.0 days. Even at a $1 CPM which is NOTHING, Digg would be earning $224,000/month. At a $15 CPM and a 15% sell-through rate, which is a reasonable example, they’d earn $500,000/month. On our sites, we have many pages monetized at $20, $30 and higher eCPMs. Surely Digg does as well, on at least part of their inventory.
So where is Digg spending money? On people? On marketing? On servers/bandwidth? I doubt that they’re spending much money on marketing because they are very well known and viral. Servers are a decent cost, but surely not more than $30,000/month (the cost of 100 decent dedicated boxes). If they need more server power than that, then for all their database savvy, they should be doing more caching and serving less dynamic content with server-intensive database hits.
So where is the cost going, to people? People who are doing what? Development, design, moderating posts and other admin work, server administration? Still, 20 people earning $75,000/year (totalling $125,000/mo) should really be sufficient to operate a site that’s driven by the users. Again, if it takes more than this, something is wrong with the organization itself. There is an inefficiency somewhere.
When a dot com has that much traffic, its site is automated/user-generated, and it isn’t raking in profits, something is fundamentally wrong about how the company is being operated. Our sites receive 2.5M unique visitors per month and close to 7M page views, and we are profitable and have never borrowed a dime. If we can do it on a small scale, and our sites are very similar to Digg in terms of what drives them (users, dynamic pages, user generated content), then Digg should be able to do it on a larger scale.
As traffic increases to a site, server costs will increase, admin costs will increase to deal with any content/user issues, and development costs (new features, fixing problems) will increase, but those costs should scale in proportion to traffic. If the company started out on a solid foundation of profitability with a solid profit margin, which obviously Kevin Rose didn’t do (or perhaps he was profitable early on, but then added expenses at a higher rate than he was adding revenues), then that profit margin should have been maintained and should have scaled as well for this type of business.
Kevin Rose needs to return to his roots, when he launched Digg by hiring a coder for $2,000. Somewhere along the line, all of the VC’s and corporate folks got their hands on the business and turned it into a money pit that thinks well inside the box. Unnecessary complexity and costs must have been added that could likely be pruned. If Rose or Adelson can’t clear out the garbage, then they should bring someone in to optimize and streamline the whole business - Digg can and should be making tons of money for its employees and founder. They need to stop thinking about getting bought, and start acting like a real company.
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Thursday, September 25th, 2008 at 4:48 am and is filed under Web Business. If you like this post why not subscribe to my full text RSS feed. You can leave a response, or trackback from your own site.
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The VC infusion shows Adelson and Rose are shopping for a new round of acquisition offers IMO. The funding is supposedly going for a new headquarters, 75 more employees, improved analytics, and increased marketing - aspects perhaps more oriented to enhancing the company’s corporate image and perceived investment value in the short-term than dramatically improving mid-term revenue generation.
According to TechCrunch Digg is currently employing 75 people (and wants to double that).
With the numbers used in your calculation, their monthly expenses should then be around $500,000.
Just because they do employ 75 people, doesn’t mean they should employ 75 people. They are thinking like a web 1.0 startup that’s trying to get bought. They aren’t thinking like a business. A business is an entity that earns more than it spends. Otherwise it’s just someone’s hobby. If those 75 people aren’t able to monetize 224M monthly page views to cover salaries and servers/bandwidth, then the business is being run poorly.
Digg is general interest, harder to get advertisers excited about putting ad dollars there, particularly with some of the amateurish behavior that goes on there (my opinion).
A large audience doth not guarantee a profit.
Interesting that all their cash will be used to add employees, features, and marketing. No comment about pushing for increased monetization. He’s succumbed to the fallacious “build it and they’ll come” mentality that only a few lucky tards got away with. Google still struggles with monetizing YouTube, and Fox Interactive hasn’t seen over-the-top results with MySpace.
It didn’t begin as general interest, it began as all tech, and it likely is still heavily tech-weighted. Tech users monetize well.
Ok twice now my comments won’t show, sorry Scott if we get this 3 times.
One of the problems I see with Diggs advertising model is there is little to no focalization. When using the tech section I get nothing but irrelevant ads. Therefore they have no chance of getting my clicks. If your advertising isn’t relevant to your users then its going to be hard to make money!
“They are thinking like a web 1.0 startup that’s trying to get bought.”
Largely agreed. Digg will likely use the latest round of VC funding to stage further leverage on potential acquisition offers. It increasingly looks like Adelson and Rose would like to cash out.
Incredibly interesting article. However I’m not surprise their ad revenue is as little as it is. Digg is well known as having a technically literate community the majority of which despise adverts. How do you make money from adverts when you have a community that hates adverts? That’s the problem digg faces.
You are right, it is almost criminal that they don’t make a profit.
To be fair, I have used digg a fair bit and never clicked on an advert, but then again I am not an “average joe” internet user.
I’d work for Digg, I just finished up a big huge database for afew hundread baseball teams
You it right on, why are they trying to double the 75 people to solve their problems?
My favorite example is Markus Frind from PlentyofFish, he has just a small customer support staff, 0$ funding, yet bringing in great revenue with huge traffic.
They are trying the age old fallacy of throw more engineers at the problem to get it done faster… but also they may want to try the IPO game if they can’t get an acquisition.
Yes perfect example, plentyoffish. Exactly what I’m saying. In that case, I think Frind hasn’t put enough time thinking about ideas, projects, etc, since he once said that he doesn’t know what he’d hire people to do, so he may be an extreme example. But, somewhere in the middle lies profitability for Digg as a sustainable business, not just an acquisition candidate. But it’s too late for them to change course, now that they signed over much of their rights to the investors.
Brian, an IPO in these times would be a dream for them, and what with the poor management, or there is just something that eats up capital that we small company folk have never heard of, or I know what it is, overstaffing.
Maybe a lot is spent on branding but it does not really seem necessary anymore
Hmm interesting take on it Scott. Part of their advertising issues that I see is no focalization. As a tech heavy site, browsing the tech diggs I see totally none relevant advertising so they have no chance of getting my ad clicks.
ehh Dang comment didn’t show up, lets try this again.
One of the problems I see with Diggs advertising model is there is little to no focalization. When using the tech section I get nothing but irrelevant ads. Therefore they have no chance of getting my clicks.
That’s probably because Digg is accepting CPM ads only, and they have such a huge inventory that they can’t possibly sell every view, hence you’re seeing either unpaid or “run of site” low-paying (untargeted) ads. CPM ads are paid per view, whether the user clicks or not.
That would be understandable, its really hard to believe that their business model is so bad that they aren’t profitable. But I guess it happens to even some of the biggest businesses.
Scott,
I’ve been following your blog here since your first post and have been impressed with your business sense. Gotta ask though… you mentioned $20-30 CPM rates on your sites and after poking around a bit all I could really find are Google Adsense ads.
I would find it hard to believe you can squeeze those rates out of adsense ads! Or am I missing something?
Thanks,
Vic
Adsense is just one piece of the pie. See:
http://www.wrevenue.com/2007/10/31/resellerratings-profile-on-monetization/
Thanks, Scott. I was just honestly curious, no disrespect intended.
Best,
Vic
I don’t understand how a site with that much traffic cannot make a profit. It is a great brand too with a lot of appeal across the internet.
I wonder what will happen with all these investments in current economic state..
This is kind of like youtube because it sold for $1 billion dollars and is yet to make profit
unbelievable that they are still not profitable. they definitely need to start cutting out some of the fluff in their company if they are still raising funds.
Yes I agree with the post, run the business normally without expectations of being bought out
Venture Capital funding is NOT “borrowing” money as you mentioned multiple times. It’s an investment for equity, not borrowing. Huge Difference. Borrowing is a loan which has specific terms for repayment.
Yeah, and at the end of the day, the VC’s all pile into the driver’s seat, displace the founders, and proceed to run a fantastic cash-cow of an Internet advertising business into the ground as a traditional expenses-sink-hole with big inefficiencies all the while trying to convince everyone to sell out at the earliest convenience rather than to simply run a profitable business over the long term and voila, that’s Digg.
VC’s want to build a business quickly to get bought. Period. It’s much easier to get bought than to go public and VC’s need an exit. So, they pour money into it, make it really big really fast with a huge growth curve of traffic and revenue so they can tout those big growth numbers, and then they prey that the business will get bought for a premium before the market changes or their growth curve starts sagging and making their business less attractive.
I think that’s idiotic. Businesses should add value and should cost less to run than they earn in revenues. Otherwise, it isn’t a business, it’s a charity or a money making get rich quick scheme.
Maybe a lot is spent on branding but it does not really seem necessary anymore, but it should be run like a company with a purpose.
Digg is good but seems difficult to earn,
I definitely love the approach on that one. You’re right on track, and i second you when you say that something is “fishy” in there. Digg sees the iceberg … They’ll either hit it like the Titanic, or if they acknowledge, they’ll only scratch their body a little bit, but still some bads will happen.
In terms of CPM could it be that Digg users are more ad blind than most and they can’t even get $1 CPM?