Digg: What Went Wrong?

You may have heard recently that news sharing/ranking website Digg had to lay off a third of its staff after a relaunch of its site flopped. Two years ago when I visited Digg on TechTrek, Digg was a darling of the Web 2.0 generation of startups. It had a charismatic founder in Kevin Rose, a veteran of the first dot-com bubble in CEO Jay Adelson, and an innovative idea that was poised to change how we consume news. Those Digg icons were all over the web. It turned down lucrative acquisition offers from Yahoo and others. Digg was the kid that was too cool for a million dollars because they had their eyes set on bigger things.

Well things have unraveled since then. Digg had trouble with mainstream adoption and lost its core users to Reddit. More importantly, Facebook’s “Like” and Twitter’s “Retweet” buttons have replaced Digg on most websites. This latest round of layoffs is the largest but certainly not the first as they’ve cut 10% of staff twice since 2009. Jay Adelson left the company earlier this year. Even the company’s major revamp, Digg 4 (which I reviewed favorably in beta), was poorly received. Digg appears to be a dead man walking now eclipsed by its rivals and its core fan base is in revolt. With such a dramatic fall from grace, one has to wonder: Was Digg’s fall inevitable, and if so should we be concerned about many of today’s social and mobile startups?

The answer to the first part of the question is a resounding no. Just look at Reddit, which has thrived during the same period of time. Reddit is a favorite of the hip, quirky, tech-savvy community. In other words the same group that made Digg cool. However, as a mainstream consumer, I would never use Reddit because its UI is unpolished and most of the top stories are kind of odd. Again, I said the same things about the original Digg. Digg knew it had to become more mainstream in order to compete with the rising popularity of Facebook and Twitter. Yet when Digg tried to change, its fanboys revolted. This brings me to my first conclusion about many startups these days:

The business interests of a social startup and the community’s interests are sometimes at odds. Niche fan bases have limited value and in the long run may actually be a constraint.

Few companies have successfully made the leap to mass adoption. Most companies have fallen to their deaths or are too timid to try. The last outcome is fine if you sell out. Reddit is part of the massive Conde Nast publishing empire so it has no pressure to grow and give its investors a payday all on its own. Digg turned down acquisition offers and tried to build its own empire. Its competition was Twitter and Facebook. The problem is news sharing is a feature on Facebook and Twitter while on Digg it is the entire product. This brings me to my second and more important conclusion:

A feature is NOT a product and definitely NOT a sustainable company.

This is what really worries me. A lot of startups I hear about these days are very narrowly focused. They have a novel way of doing something but they compete against one feature of someone else’s product. The current environment makes it possible for these companies to get funded and move their ideas to market, and there’s nothing wrong with that. There is some real innovation going on here. However, it’s foolish to think there are any fortunes to be made with most of these startups, and founders and investors alike would be wise to sell sooner than later.

I don’t think there’s going to be another bubble like 2000 because this boom is not driven by the stock market. Even if a lot of these companies fail, there will be a much smaller impact on the overall economy. However, you do have to wonder how many of these companies have a future. For example, I’m worried about Foursquare and Gowalla. Although they’re slightly differentiated and have strong communities, they are merely features on Facebook. With Facebook Places and the inevitable check-in fatigue setting in, they could risk becoming the next Digg.