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

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.

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TOPICS: SMBs, Tech Industry
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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

David Gewirtz, Distinguished Lecturer at CBS Interactive, is an author, U.S. policy advisor, and computer scientist. He is featured in the History Channel special The President's Book of Secrets and is a member of the National Press Club.

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5 comments
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  • don't let the inmates run the asylum, really?

    Thank god you were not in charge at Coca-Cola when they released 'new coke'. Clearly from your article Coca-cola were wrong to 'let the inmate run the asylum', when they reverted back to coke classic.
    Jean-Pierre-
  • Article is waaaaay off the mark...

    I'm tired of seeing this story rehashed with the same bad information time and time again. First off, I don't care how much Digg sold for, as a user, I knew they were done when they released v4 of the site. I've since visited on occasion just for old times sake, but they screwed up majorly when they tried to monetize the site over the objections of their users. It was sneaky and underhanded and it made us, their only product, feel like a product. Your comment about 'don't let the inmates run the asylum' was frankly retarded and makes me wonder just how much you knew about Digg. It was entirely user-content driven and it was that attitude, that 'my users don't matter' attitude that killed them. Facebook and Twitter didn't have a thing to do with it. That's just rehashed crap again. No one went to Facebook and said, "OMG, this has everything Digg had, I'm home again!" REDDIT KILLED DIGG. Reddit was Digg's main competitor and when Digg alienated its core userbase, they flocked to Reddit and continued on because Reddit didn't pull the same crap and try to package and sell their users to advertisers. Look at the Alexa traffic stats and you can see the balance of power shift at the Digg v4 release. Just like Netflix and their recent debacle with doubling their pricing, it was poor management, a lack of humility, and an unwillingness to listen to their users that caused their downfall. Twitter and Facebook? Please.
    steed074@...
  • Bad example

    The New Coke ruse was a great strategy that worked perfectly.

    Coca-Cola was looking for a way to increase profits, and wanted to switch from sugar to high fructose corn syrup as a sweetener. But the taste is so vastly different (and worse), they had a problem. How to switch without generating a user backlash that could affect market share for a long time.

    The New Coke strategy was a stroke of genius. They switched to a new formula that was optimized for HFCS, and rolled it out to great fanfare. They would have been happy if it was accepted; ingredient costs had been dramatically reduced.

    Instead, the public rebelled. Demanding the old Coke back, a number of people switched brands, or boycotted. Sales reduced noticeably. Was it a disaster for the brand?

    No. After all the "old Coke" had flushed out of inventory, Coca-Cola reintroduced the old formula as Classic Coke. Sort of. The new old Coke no longer contained sugar, but rather HFCS. For the cost of a few quarters of reduced sales, Coca-Cola was able to permanently reduce ingredient costs and improve both profitability and supply reliability.

    The New Coke "debacle" was a profitable long-term success.
    vulcan666
    • Not true.

      New Coke was introduced because Pepsi was kicking Coke's behind in its famous taste tests. What Coke didn't realize until too late was that when you're taking a couple sips of something, sweeter is generally good...but when you're drinking a whole can, you don't necessarily want it so sweet.

      http://en.wikipedia.org/wiki/New_Coke#Conspiracy_theories
      LeonBA
  • Greed

    Anyone who starts a business for the main purpose of making money will likely fail. You start a business to solve a problem or provide a service, making money is how you determine its success.

    Any investor who expects to double their money in 18 months is a fool ripe for picking. They certainly shouldn't believe promises like that. Or to put it another way: Some people are lucky, some people aren't lucky and some people are careful with their money.
    shanedr