Digg wasn't outmaneuvered. Greed and poor management buried it

Summary:It wasn't that Twitter and Facebook outmaneuvered Digg. The difference was maturity. Twitter and Facebook kept their eye on their corporate mission and their message discipline.

The blogos-fear is all a-twitter this weekend with news of Digg's demise. The digg.com domain and the site itself was sold to Betaworks for all of $500,000. That's less than Kevin Rose's beer budget for 2006.

Of course, the half-a-mil isn't the full story. Some tech sold to LinkedIn for a few million dollars (which included patents), and there's some bizarre story that the staff of Digg sold to the Washington Post for $12 million. Although Digg's team had the vision thing down, their discipline and execution left a whole lot to be desired. Why WashPo would want that crew (and its associated baggage) for $12 million is beyond me.

But the real question is this: what can we learn from this debacle?

After all, Digg was once the poster child for the new, post-dot-bomb Web. Kevin Rose was on the cover of BusinessWeek with the "gee wow!" headline of "How This Kid Made $60 Million in 18 Months." As it turns out, Rose never made that. It's just what investors had valued the company at during that very short snapshot in time when greed and lack of due diligence led to BusinessWeek cover headlines.

Let's get the acknowledgement out of the way. Digg was innovative for its time. It was one of the first companies to use the power of people to fuel content, paving the way for Twitter and Facebook to follow along.

So what went wrong?

According to an article in the Wall Street Journal, "the news-sharing site was outmaneuvered by Facebook Inc. and Twitter Inc."

True, Twitter and Facebook executed far better than Digg. Even though Mark Zuckerberg is seven years younger than Digg founder Kevin Rose, the public personas of the two can't be further apart.

Rose built up his name first on TechTV, then by hosting Diggnation, a podcast on a couch with beer and a friend, more reminicent of Bob and Doug McKenzie than anyone with any management experience from McKinsey & Company.

But it's not really all Rose's fault. According to an old 2007 TechCrunch article by the Bay Area's favorite whipping boy, Mike Arrington, the Diggsters had a number of in-hand offers for $100 million, but were holding out for more, $150 mil or better.

There was a snapshot in time, probably around 2006 or 2007, when the company could have sold for $50-100 million, the site could have been incorporated into another property, and the founders could have moved on to new things.

But they didn't sell. At that time, they thought there would be an even bigger payoff if they just milked it a little longer. I've seen this misguided optimism in the investor community before.

Back when I first started ZATZ in 1998, we had five employees, we were running on our own profits brought in from ad sales and custom services, and we were talking to investors. We had our own CMS. I wrote an enterprise content management system called ZENPRESS that, even in 1998, was more advanced than those used by some major sites today, so we actually had a few tangible assets.

But we were told by each prospective investor that walked through the door that our business plan had to show how investors could put in $5 million and get out $5 billion within 18 months. That was greed. I always liked the potential for ZATZ, but I never believed it was a $5 billion company. Even so, we were strongly encouraged to invent some sort of business case to satisfy investor greed. I refused.

I never believed there were many companies that were worth $5 billion unless, you know, they actually sold more than $5 billion in a year.

The (potential) investors were insane with their greed. They really believed that the money should just be there, regardless of whether the business model could support it. They just thought that they'd fill out the right forms, say the right words, wait less than two years, and make $1,000 for every dollar invested.

It was ludicrous. We never took their money. We continued fueling the company on its own power. ZATZ is still running today, chugging along, and paying its bills.

But the Digg golddiggers were greedy. They also weren't very good at running a company. Their system upgrades failed regularly. They were repeatedly held hostage by their users, unable to manage their own audience. They constantly swapped management when it became apparent that the company wouldn't net billions.

Digg is a textbook example of how the dot-bomb meltdown came to be. Digg was a nice little opportunity with a pleasant, but not earthshaking, first-mover advantage -- squandered out of a sense of entitlement.

What are the object lessons business owners should take from Digg?

The first is this: be practical, not greedy. If you're not planning on staying in for the longest haul and you get a reasonable offer, take it. You have a fiduciary responsibility to be responsible to your investors, even if your investors are greedy SOBs.

Next, focus on the fundamentals. Digg let itself get carried away with notoriety. Rose appeared in GoDaddy party commercials rather than staying at work and managing his team. The lesson here is that GoDaddy is doing fine, and Digg is being broken up for chump change.

Finally, don't let the inmates run the asylum. When Digg had to make some changes, users rebelled. This became the company story, hijacking the agenda from disengaged management. If you're providing a service, you're paying the bills, and you're doing the work, it's your business, not your users. Yes, you have to meet their needs, but you need to set the agenda, not them.

When you look at other companies and compare them to Digg, you get a completely different picture.

Sure, we're still not entirely sure how Twitter will make money, and it seems unfair that they're cutting off LinkedIn and app makers from their API. But the company's management team seems to think it's for the good of their company agenda.

Sure, Facebook's stock may not have flown as far and wide as it should have, but there's no doubt Facebook is a company with excellent management.

It wasn't that Twitter and Facebook outmaneuvered Digg. Both Twitter and Facebook have made their share of mistakes, from regular fail whales to Facebook's universally reviled Beacon service. It wasn't even that Twitter and Facebook were better funded or were smarter.

No, the difference was maturity. Twitter and Facebook kept their eye on their corporate mission and their message discipline.

Digg did not.

Can you dig it? Can you dig it?

Digg, apparently, could not. Bury this one.

Topics: SMBs, Tech Industry

About

In addition to hosting the ZDNet Government and ZDNet DIY-IT blogs, CBS Interactive's Distinguished Lecturer David Gewirtz is an author, U.S. policy advisor and computer scientist. He is featured in The History Channel special The President's Book of Secrets, is one of America's foremost cyber-security experts, and is a top expert on savi... Full Bio

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