A Wrench in Silicon Valley's Wealth Machine
businessweek.com
businessweek.com
Trying to look at Digg objectively. They don't make money with their current number of staff people and revenues. Maybe their readership will increase to a point that they will make money (assuming they don't need more staff as readership increases). Maybe they'll be able to cut staff and slow down "product growth". Of course, that risks a competitor out-doing them.
Likewise, Facebook hasn't found a way to be popular. Their userbase keeps increasing, but they're at a level where the scaling problems get real bad and require lots of staff. They're also adding users from places advertisers don't pay as much for (while they cost Facebook more in terms of things like bandwidth).
The question really is whether these companies can become profitable and whether they can become profitable to the extent required by their valuations. For example, assuming a yearly profit of $100,000,000 and an opportunity cost per year of 10% (investing in something else) and a 100 year lifetime, Facebook would be worth less than $1B. And that's assuming they're able to make $100M per year for 100 years.
Even if you say they're going to make a billion per year for 100 years from this date, they're still worth less than $10B. And why should we assume they'll be around in 10 years never mind 100. Friendster of 2002 is (6 years later) a has been.
I'm not saying that Facebook is bad, but 100 years is a lot of staying power. Heck, what technology firm can claim such a thing. Venerable IBM will hit 100 in a few years. But IBM is not the dominant company many people invested in over the years. They don't even have a PC business anymore.
Many technology firms go under because they aren't able to produce efficiently enough to stay afloat. Unlike Microsoft, Facebook can't just raise prices because their paying customers (advertisers, not users) can go somewhere else unlike Microsoft's lock-in. They can't charge users because the value they have is based on having so many users and the competition would love if Facebook gave them such an in.
Many of these things are cool, but there's a big question as to how much money they can make. With high valuations, it's not just about making money, but enough money to justify that valuation. I think investors are looking at that now rather than thinking, well, this is really popular therefore has a lot of value.
So, if I just took that money and suck it in a stock index fund, in 100 years I'd have over $206trillion at the end. So, it's not enough for Facebook (or anyone) to make money off of money invested. It must make more money off that investment than the investment could get at a standard investment rate. If Facebook is worth $100trillion in 100 years, it doesn't justify a $15B valuation because that $15B would become over $200trillion in average stocks.
Specifically, the math is: sigma[1,100,$profit/1.1^k]
Sorry for the notation. In plain English, for year 1 through 100, add the profit for that year ($profit) divided by 1.1 raised to the year number.
In python: value = 0 proft = 100000000 for i in range(1,100): value += (profit/pow(1.1, i)) print value
To summarize: Facebook needs to be able to beat a blind investment by their valuation in order to justify that price.
Even this article is full of half-truths. Employees are "committed for the long term" yet the bulk of them have been hired during the last six months, and 40% of the early employees have left.
I concede having no knowledge on any of these other fronts, but I don't understand how all the good PR that comes from Rose's ubiquity in tech media can be anything but crucial to Digg's success.
Digg is a business that could have been run really frugally and sold for $50-$100 million. It's not a business that should have been blown up to 80 employees and hundreds of servers.
I agree Kevin Rose and Jay Adelson messed things up, but how is new leadership going to undo the spending of so many millions of their investor's dollars?
1. Wind up revision3.com and move diggnation back to digg where it should have been.
2. Lay off 80% of their employees.
3. Instead of endless refinements of the "digg" concept (which nobody really cares about anymore), leverage the traffic to make the site more portal-like (I know those are bad words but they'd work for digg). Simple first step - expand into the huffpo realm.
Admittedly this is wishful thinking. Probably the first step to actually making it happen from a CEO's perspective would be a lawsuit against Jay, Kevin and Rev3. Which probably wouldn't go so well.
I just wonder how they blew through so much cash. All the new features have sucked. I guess it all goes to biz dev guys...
On the bright side, maybe the founders will silently pass into obscurity.
At the moment it's showing me adverts for women's weightloss products, digg really should be able to figure out I'm male.
Worse yet it's showing me US only adverts (when I'm in Europe). Half of Digg's userbase is outside the US (quantcast data) - they're wasting 50% of their inventory. By setting up ip geolocation targeted advertising they could significantly improve their CTR.
Google search lists links.
Digg should sell content placement at the top of their lists of links and content placement in the sidebars like Google does and Techmeme as well.
This way, instead of hiring a team of 4 people to game Digg like the Chicago Tribune did, they can just pay the money straight to Digg for front page placement and call it a day. Everyone's happier and you get fewer marketers spamming the site night and day.
There are women on Digg? Knock me over with a feather. If you've ever been to (or seen photos of) their events, they fairly scream "sausage fest." Hell, when you look up "sausage fest" on Urban Dictionary, they might as well put the Digg logo up there in lights.
From profits that real businesses should have.