Digg Feedback: Responding to TechCrunch

Yesterday, TechCrunch and a bunch of other blogs gave my story on Digg and Web 2.0 a nice shout-out. Thanks blogosphere.

In his post, TechCrunch editor Michael Arrington expresses shock at the size of Digg’s revenues. (I too was shocked!) Arrington then goes on to say that Digg shouldn’t be losing money.

“They have over 70 employees, the company recently confirmed, and plan to grow to 150 by the end of next year,” he wrote. “That’s an awful lot of people for a company that outsources sales and content creation, and has little to do besides focus on keeping the servers humming.”

Then he closes out his argument by suggesting that Digg fire most of the company to reach profitability. “Digg could turn itself profitable, even at these low revenues, by simply firing much of its staff,” wrote Arrington. “Instead they choose to lose $5 million or more this year.”

Now, losing money is not a winning strategy for any business, but I think Arrington’s medicine may be a bit too harsh. Digg is four years old. Most startups don’t turn a profit until years 5 through 7, if that. Plus, Digg has a chance to create a truly groundbreaking business so it’s worth investing for the future.

However, I do agree that Digg could be accused of suffering from a bubble-era mentality. Clearly, until the last few months when the financial crisis hit, Digg was focused on growing its audience (in the hopes of selling the company) and not spending enough energy or resources growing its business. CEO Jay Adelson admitted as much when he told me in a previous story that the company had NEVER focused on growing revenue or controlling costs until just recently.

So should Digg be running a tighter ship? Yes. Case in point: Digg’s losses should be shrinking as a percent of revenue, but in fact they are growing. In the first three quarters of this year, Digg loss was 63% of its revenue, compared to 58% in 2007.

But firing much of the staff would be too harsh and inappropriate, making it harder to develop features and products and partnerships to grow the business. I think a trim of 10% to 25% would be more appropriate, or at least a slowing of hiring until the company’s revenues grow and its margins begin to move in the right direction.

The good news is that Digg CEO Jay Adelson now understands all this. (Check out my previous story, Digg: Not For Sale, in which Adelson lays out his new game-plan.) He knows the easy money days are over and he’s got to focus on growing the company’s revenues and lowering its costs. In comments that were not published in my stories, he told me that the company may not end up doubling its staff. Hiring will be slowed, he said.

The company is also introducing several new initiatives in the next year that should accelerate revenue growth (mobile ads, search ads, new features aimed at getting people to spend more time on the site, perhaps the ad service Arrington mentions.)

This is all a good thing; the question now remains: Did Digg wait too long to make this shift?