Has there ever been a successful Internet turnaround? A quick look at the carcasses of fallen Web 2.0 stars like Myspace, Friendster, Bebo and Ning support conventional Internet wisdom: Once an online brand goes south, it can’t be revived.
Today Betaworks acquired Digg to prove everyone wrong.
The New York incubator only paid $500,000 for Digg’s technology, according to the Wall Street Journal. At that valuation, you’d think Betaworks would just buy the technology and user base, integrate it into News.me (which has users in the “tens of thousands” compared with Digg’s millions), and call it a day. That would be a much less daunting task than what it actually plans to do, which is revive the Digg brand. ”They want to reinvent Digg. They’re doing a new version from the ground up,” Digg CEO Williams told me.
Betaworks is merging the property with News.me, one of its promising mobile news aggregation startups. And Betaworks founder John Borthwick (pictured) will become Digg’s new CEO. The time and energy involved in that sort of arrangement make the deal a real investment in an Internet turnaround.
Borthwick has acted as Interim CEO of Betaworks companies before; the “startup factory” incubates companies and then spins them out (retaining a stake), when it comes time for them to take on outside investment. News.me is still in the incubation stage.
When “turnaround shops” in the private equity world buy failing assets at rock-bottom prices, they succeed by whipping a sloppily run company into shape, stripping out costs, moving manufacturing overseas, streamlining operators, and laying people off.
That’s not really possible with a consumer Internet company (especially one that’s already sold off all its employees to the Washington Post). With consumer Internet, users are fickle and there’s always a new bright shiny object to take our attention. The best thing going for this deal is News.me’s heavy focus on mobile and tablets, a place Digg hasn’t been as strong.
The price tag is a little depressing when you consider the $45 million Digg has accepted in venture backing over the years. The deal consists of stock and equity, so Digg’s backers could still be holding out for a better payday. Since Digg has been sold “across a couple of transactions,” the overall value is still “significant,” Williams says.
Most would argue that Digg killed its staying power by giving in to its core users. It surrendered to its community’s rallying cries and lost its chance at mainstream adoption, while sites like Twitter and Facebook executed on the same vision, getting there mostly by ignoring the angry outcries of its early users with each update.
The bloom has been off the Digg rose for a couple of years, even though, as the company reminded us last Fall, it still has 17 million monthly uniques. The site shed its 15 engineers to Washington Post subsidiary Social Code in May. (Williams will transition out of the company and become an entrepreneur-in-residence at Andreessen Horowitz.)
Of course, Digg has been trying to sell itself forever, depending on who you ask. At the height of its popularity, the company’s acquisition valuation has been reported as high as $300 million. In the latest round of deal conversations, Williams says he and Kevin Rose talked to “pretty much everybody,” eventually realizing that both old media and large tech companies were the wrong fit. The company eventually turned to startups and incubators, which is how it found Betaworks.
Betaworks faces a challenge in keeping the Digg brand alive, reviving it, keeping its existing users happy, and making it mobile. All without stifling any future success for News.me, which is just getting started. If the company pulls it off, it may be the Internet’s first ever turnaround story.