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Topic : How to Start a Successful Startup?
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Entrepreneurs: Success Stories

 
By : Vivek Panwar, Project Lead, Unisys
Industry : Internet Functional Area : Success Stories
Activity:  2 comments  884 views  last activity : 06 29 2012 01:32:23 +0000
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Written by Nisan Gabbay

Digg has become one of the poster children for Web 2.0 success since its launch in December 2004. Digg is a news and content website that employs non-hierarchical editorial control. With Digg, users submit stories for review, but rather than allowing an editor to decide which stories go on the homepage, the users do. While Digg does not fit the Startup Review criteria for success perfectly (i.e. they have neither successfully exited nor generated large revenue) they have amassed some impressive site traffic in less than two years: 600,000 registered users, 10M daily page views, 1.5M daily unique visitors (UVs), and 10M monthly UVs. Digg has also had a profound effect on the online news business, with many established industry players taking note of their success.

Interviews Conducted: Jay Adelson, CEO and co-Founder, Digg.com. Mike Maser, VP of Marketing, Digg.com. Two interviews with people at large news media sites that chose not to be disclosed.

 

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Key success factors
Attracted story submitters by providing transparency

When Digg was launched, it was critical to attract the power users who devoted the time to submit stories to Digg. Today, attracting submitters is not a critical success factor, but in the early days it was. Now that Digg has an audience of 1.5M daily unique visitors, authors of stories are motivated to submit directly to Digg for the traffic benefits. Plus, with close to 600,000 registered users and 5,000+ daily stories submitted, it is unlikely that Digg will miss out on finding interesting stories. In fact, the challenge for Digg has now shifted from fostering story submission to figuring out how to ensure that relevant stories are matched to each Digg reader and the entire community.

However, one of the biggest challenges in starting any user generated content site is incentivizing users to contribute content before the network effects provide users with the appropriate motivation. Digg solved this problem using three techniques: transparency, recognition, and competition.

One of the great insights that Kevin and Jay made with Digg was that users of other services were frustrated by the fact that those services operated as a black box. People submitted stories to the editor, the editor reviewed the submissions, and somehow a decision was made as to what was newsworthy material. The submitters were unable to decipher why their stories weren’t selected or how close they might have come. Digg made this process completely transparent for people. Submitters could now see what was popular and fine-tune their submitting accordingly. This is what got people to start submitting to Digg, in addition to or in lieu of Slashdot (and other content sites). Transparency also made the process fun for users, providing another incentive to submit. When I submitted my first story to Digg it was a thrill to see how my story was competing with other submissions.

After leading with transparency, Digg evolved the community features to foster recognition for submitters and a sense of competition amongst top submitters. People could see how they compared to other users in terms of number of submissions, hit rate of submissions, etc. This helped to build an active and loyal community of submitters.

Created an innovative online news product appealing to readers

For all the theoretical discussions of how Digg has democratized news discovery and promotion, I think that their success can be boiled down to a more fundamental factor: people like going to Digg to read news stories. Sites like Yahoo News and Slashdot were established incumbents with seemingly well-satisfied audiences, but Digg creates a more engaging product for readers in the following ways:

1. Taps into human desire to know how one’s views compare with others. It is somewhat amazing just how much we as humans seek the validation of others. We are constantly trying to know how we compare to the crowd and what the crowd thinks is “cool”. Digg taps into this desire by providing a transparent means to compare what you think is interesting to what the crowd thinks is interesting. (Side note: I was an engineer by training, but I wish I would have taken some psychology and sociology courses in school, because I am finding that understanding basic human desires and how they manifest themselves is critical to creating consumer Internet products.)

2. Element of surprise. Readers enjoy browsing Digg because of the element of surprise - you never know what quirky story you will discover. Many of the popular stories are helpful technology tips or humorous in nature; stories that traditional news editors wouldn’t consider newsworthy.

3. Reader comments / discussion improve the original story. Digg makes the news participatory by providing an inviting forum for readers to express their thoughts and opinions. This improves the original story by providing different perspectives and reactions to the original story.

4. Provides a constant stream of fresh news content. Readers can see what the most popular news stories are for any time increment. Do they want to know what the story of the day is, story of the week, or what’s newsworthy in the last 10 minutes or last hour?

The Kevin Rose persona

I believe that Kevin Rose’s personality and public persona played a big part in Digg’s success. Initial users wanted to see Digg succeed because they wanted to see Kevin succeed. When Digg was raising its first VC round, some well-respected Internet investors felt that better products were about to be launched that would unseat Digg. However, we have learned that having a superior technical product is not necessarily the determining factor for success. Consumer Internet services are both an art and a science. The Kevin Rose persona was a big contributor to the “art” side of Digg that is impossible to replicate by competitors.

I also believe that the Diggnation podcast has been a big contributor to the success of Digg. While both Jay and Kevin do not believe that the podcast was one of the key success factors, I respectfully disagree. Jay’s rationale was that the Diggnation podcast was only started once Digg was a success, already having 100,000+ users. Furthermore, the podcasts get 250,000 unique downloads per month versus 10M UVs per month to the Digg site, thus only 2.5% of Digg visitors listen to the podcast. However, the podcasts are a showcase for Kevin’s personality and help to build a loyal community around Digg. Furthermore, Kevin’s previous position as host of ScreenSavers was another key success factor for Digg, as you will read in the “Launch strategy” section below.


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Launch strategy
One of the first key decisions that Digg made was to focus its initial product on technology news. The Digg team considered applying the Digg concept to product reviews or other types of news, but recognized that the tech audience made the most sense. For one, tech enthusiasts tend to be early adopters. More importantly, this was an audience that Kevin Rose knew well and had access to. Prior to starting Digg, Kevin was the host of a technology cable TV show called Screensavers that aired on the TechTV cable channel. Digg got its initial site traffic by having Kevin Rose announce the Digg launch during a broadcast of Screensavers. This gave Digg immediate exposure to ~100,000 target users – a nice initial distribution impulse function to get started.

As it turned out, the tech enthusiast community was ideal to launch Digg for another reason: natural search ranking, i.e. SEO (search engine optimization) benefits. Because tech enthusiasts tend to be an audience that does a lot of web linking – either via blogs or websites – Digg received a lot of inbound links in a very short period of time. As I noted in the Flickr case study, developing viral features was a key to Flickr’s success. Digg also benefited tremendously from releasing its “blog this” feature early. The “blog this” feature made it easy for bloggers to blog, and hence link, to stories they see on Digg. By collecting lots of inbound links, Digg stories naturally began to rise in the natural search rankings on Google and Yahoo. This set the stage for a key exposure point in Digg’s history: the Paris Hilton cell phone hack story.

One of the first bloggers to break the Paris Hilton cell phone hack story submitted the story to Digg. Because Digg was ranking highly in natural search results, when people searched for this story on Google and Yahoo, the Digg landing page was one of the top ranked results. This sent a massive surge of traffic to Digg, and serves as a good example of what continues to fuel Digg’s growth. Of Digg’s 1.5 million daily unique visitors, a large percentage come from people searching for news via search engines. Given that people search for news in short-lived time windows around when a story breaks, Digg is perfectly positioned to capitalize on this traffic. Digg is able to capture this traffic because of what I will call its blogger linking network, coupled with it’s story submittal process that quickly discovers newsworthy stories.


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Exit analysis
Digg’s valuation has been in the spotlight recently due to the August 14 Business Week cover story that claimed Kevin Rose made $60M in 18 months. Given that Digg has not been acquired or gone public, the $60M number is not grounded in any confirmed fact. I was also reassured by Digg CEO Jay Adelson that there has not been an additional equity financing since Digg’s $2.8M Series A investment in October 2005. Thus, Digg’s true current market value is anybody’s guess.
Digg’s market value cannot be assessed based on current revenues, as Digg has not placed much effort into optimizing its revenue streams. Digg is relying on FM Publishing (in essence an outsourced sales force) and Google AdSense to monetize its current 300M monthly page views. There is a lot that Digg could do to improve the type of ad formats and site sponsorships it offers to advertisers, and hence increase its effective CPM rates. Furthermore, Digg has larger potential revenue streams down the road if it can effectively extend the Digg brand into new product categories like product reviews that could be monetized via affiliate marketing fees. So what is a reasonable estimate of Digg’s current market value?

My back of the envelope math says $120M feels about right. The best market comp is the New York Times Company. The New York Times Company is expected to generate roughly $270M in revenue this year from its online properties, which include NYTimes.com (500M monthly page views), About.com (450M monthly page views), and Boston.com (150M monthly page views). To make the math easy, $250M in annual revenue for properties generating 1B monthly pages views, means each monthly page view is worth $0.02 ($250M/(1B*12)). Applying this $0.02 per page view revenue comp to Digg would indicate a yearly revenue potential of $75M at Digg’s current traffic levels. However, The New York Times properties are much more valuable than Digg because they have a more respected and better well-known brand with advertisers, have premium pay products, and reach a broader audience. It is anyone’s guess as to how Digg will stack up from a monetization standpoint, but I think 25% as valuable is a reasonable guess. That would mean Digg probably should be at a ~$20M revenue run rate. Assuming 30% EBITDA margins and a 20X EBITDA multiple, Digg would be worth $120M. Given the current hot market for fast growing Internet properties, Digg could probably fetch that number or more, a reasonable range is $120M - $360M. While speculation about market value might be a fun exercise, the more important question is whether Digg has created a valuable, sustainable asset for a potential acquirer? I think the answer to that question is yes.

Digg has created a number of valuable assets. As mentioned in the launch strategy section, a loyal following of techies with a penchant for blogging assures high natural search rankings – this is critical for any content-oriented site. Secondly, a community of engaged story submitters and comment contributors is a difficult thing to replicate, even for sites with a large audience. While competing sites will get better at fostering community, getting the formula correct is not an easy process. Third, Digg has begun to establish a mainstream brand. They have done a great job of fostering PR, and the longer they keep
the PR machine humming, the more defensible their brand will become. Brand is defensible.


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Food for thought
I have made most of these points above, but I’d like to summarize here for emphasis. There was some healthy debate in the blogosphere awhile back about not designing Web 2.0 products around the 100,000+ TechCrunch RSS reader audience, sparke by Josh Kopelman’s post. The idea being that Web 2.0 entrepreneurs should build products that solve products for a mainstream audience rather than a feature for a tech geek. I agree with that point. However, I believe that Digg showcased the true value of targeting the tech geek audience and why they matter. They matter because they blog and they link. Digg reaped the SEO benefits of having this group in their favor, enabling them to reach the mainstream audience with no marketing expenditure as a result of high natural search rankings.

My second point is that once again we see the value of an initial distribution channel to jumpstart an Internet service. Kevin Rose was able to publicize the launch of Digg to an audience of 100,000 target users on his cable TV show. I’ve now seen MySpace, Skype, eHarmony, and Digg have an initial impulse function on launch. However, companies without this initial impulse have also been successful, for example Craigslist and Flickr. While it is possible to be a success without large initial distribution, it certainly seems to improve the likelihood of success. Without this distribution, the keys are to be either: a) extremely viral, social products, b) SEO friendly, and/or c) have enough margin and search volume such that SEM works.

Finally, and this may seem simple on the surface, but is actually quite hard in practice – understand the initial problem you are trying to solve and build the product around that. The recognition by the team at Digg that submitters lacked transparency to editorial review processes at other sites (that seemed arbitrary and unfair) was enough to get the initial contributors over to Digg. Without a critical mass of early submitters, Digg could not have successfully gotten off the ground. Understanding what motivated those submitters and solving their frustrations was a key stepping stone for Digg.


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Reference Articles
There has been a lot written about Digg in the blogosphere, here are some links to noteworthy posts.

“Digging Distributed Journalism: Digg.com” on MadPenguin.org, December 16, 2005
Nice long interview that details the history of Digg

“347 words from digg’s kevin rose” on twopointouch, August 11, 2006
Short interview with Kevin Rose that provides some good data on Digg site metrics and has Kevin’s perspective on why Digg was successful.

“Gadgetell Exclusive: Interview with Digg’s Kevin Rose”, Gadgetell blog, January 25, 2006
Some good background on how Digg got started and interesting questions from the audience.

“Future of Web Apps – Kevin Rose”, CenterNetworks blog, September 13, 2006
Good notes on Kevin Rose’s presentation at the Future of Web Apps conference.

VentureVoice Podcast with Jay Adelson, August 11, 2006
Very long interview with Digg CEO Jay Adelson. Much of the interview is about Jay’s entrepreneurial experiences.

 
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2 comments on "Digg Case Study: Why techies are an important audience"
  Commented by  Business Management Consultant, Business Management Consultant, Strategic Planner & Strategic Management Specialist    | 06 29 2012 01:32:22 +0000
Digg is a good platform and distribution channel.
  Commented by  Samir Nigam, Sr. Software Engineer , SRM TECHSOL Pvt. Ltd.    | 07 27 2008 22:38:28 +0000
nice.
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