Who will digg Digg, and for How Much?

In its annual book of predictions "The World in 2007", The Economist puts it as a foregone conclusion that Digg will get snapped up for a fortune this year and that Kevin Rose will become a household name.  According to some estimates e.g. Alexa (I can see some buries coming for citing that as a source), Digg is daily read by approximately one in hundred Internet users . The site which put social news on the scene, with a great position to soak up a whole lot of new users and traffic as it adds more categories (witness the quick success of the US Elections 2008 category), will certainly be a prize catch for any acquirer.

While rumors about Digg's acquisition seem to crop up every few weeks, only to die away until the next one starts, I do believe in this particular prediction. Besides being a sucker for predictions made by The Economist, I can see several dynamics afoot which makes a Digg acquisition in coming months, a relatively high probability. As prosaic as it sounds, the biggest dynamic is the race being fought to become the lead gateway to the Internet content. Digg with its brand and existing network provides a big step forward towards that leadership.

From the perspective of Digg's management and investors the financial rewards will of course be the primary reason to sell. But they can (and will) give several other good reasons for the sale. A bigger owner provides much greater credibility. For example, Google recently signed a deal with BBC which will allow users to find BBC short-form content and specially made material through YouTube. It is very likely that Google's brand and reputation helped in inking this deal. A greater insight into traffic patters and rogue users will enable the owner to put up a much more effective fight against Digg's perils such as  crowdhacking. Digg also has new competition at its heels - netscape.com, Slashdot Firehose etc. (Although as of March 2007 netscape.com seriously lacked usability and look and feel. The comparison of digg and netscape.com looks more like clean look of Google vs. cluttered look of Yahoo.) It may be better off in the arms of a bigger parent, while trying to maintain and increase its lead.

So, who are the potential diggers for Digg? The usual suspects are Google, Yahoo and News Corp.  I wouldn't be surprised if Microsoft has its eyes on the girl as well. The acquisition will almost certainly be based on strategic importance of Digg, rather than its current revenue stream at the time of the sale. So, the buyer will need to have longer term view of the Internet leadership, with ability to overpay when needed.

One of the earliest rumors of Digg acquisition centered around Yahoo back in January 2006[1]. The acquisition price was rumored around $30 million. With acquisition of Del.icio.us and Flickr Yahoo firmly indicated its hunger for leading Web 2.0 community sites. On the other hand, currently Yahoo's biggest challenge is not getting more users and traffic - but how to monetize them effectively. Until it figures out the secret sauce of efficiently monetizing its already huge traffic, it may be leery to put in top dollars for another web property.

News Corp with its news distribution holdings (TV Channels, Newspapers, Magazines), would certainly see the value of the social news phenomenon. If the business of news was a zero-sum game, then News Corp could easily justify the acquisition price of Digg to the revenue shortfall from losing readers from its current news properties to likes of Digg. Recent rumors of Digg acquisition have been around News Corp. The value of the deal was said to be between $150 million and $200 million.  By this logic Time Warner would be another potential suitor - however it seems to have lost appetite for relatively large Internet related acquisitions after its  ill-timed acquisition of AOL. Besides, Time Warner is trying to duke it out with its launch of a Digg like service on netscape.com.

Microsoft has a huge war chest and sharp jealousy for Google's success. It has tip-toed into social news arena, with its launch of MSN Reporter in very few geographies. While Microsoft has the wherewithal to catch up if it really puts it focus on something, it may decide that it doesn't want Digg in laps of its number one nemesis. Also, catching up to Digg is not just about technology, it is much more about the social network that is already built around it. Digg has had 50,000,000+ diggs [2] and close to a million registered users[3]. This social network has even created a tangible value for each digg - currently pegged around $1 per digg[4].

Google describes itself as the global technology leader focused on improving the ways people connect with information. Digg is all about improving the ways people connect with news. Google does not have a significant overlap with Digg, and Google News could potentially be integrated with Digg in very interesting ways. Google has a piggy bank filled with 11.2 billion dollars (10-K Filing, 31st December 2006) and has shown its ability to overpay for strategic properties with its acquisition of YouTube. Google has leg up over every one else because of one more important reason: It runs the advertisements on digg.com, which gives it access to the kind of information about Digg that no one else can lay their hands on. Google will be in a very good position to make an informed offer for Digg. I am giving my digg, aka vote, to Google for chances of winning the hand of this dame. Assuming the current Web 2.0 party continues, I will bet on an offer above $250 million[5].

Talking of Web 2.0, as you have probably noticed this site still needs to catch up. To leave comments on this article, I have started a thread on our forums.


References:
[1] Several blogs in January 2006, e.g. Yahoo Will Buy Digg - Announcement Early Next Week
[2] Kevin Rose's Blog on Feb 1st, 2007. A Couple Updates...
[3] Guesstimate based on their reaching of 500,000 registered users mark in mid-2006. Great news for digg!
[4] Sightings of users offering $1 per digg (e.g. Digg my site, $1 per digg, takes 30secs) and services like User/Submitter
[5] Note the deep technical analysis before coming up with that number :)

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