It Costs Digg $5 Million a Year to Run the Internet

Perhaps Digg really is the future of the news business. The headline-discussion site, once an icon of the Web 2.0 movement, is losing millions of dollars a year.

BusinessWeek's Spencer Ante got ahold of Digg's financial statements. They are frightful, even for a startup. Last year, the company took in $4.8 million and spent $7.6 million, for a loss of $2.8 million. In the first nine months of this year, losses grew almost as fast as revenues: Digg took in $6.4 million and spent $10.4 million, resulting in a $4 million loss. At an annual clip, that's more than $5 million out the door a year.

Keep in mind that Digg has a lucrative three-year advertising deal with Microsoft, that pays the site a guaranteed rate for its inventory. Without that arrangement, struck last year — driven, most believe, by Microsoft executives' desperation to get in on the Web 2.0 craze — Digg's losses would likely be far worse.

Now it all makes sense: Digg CEO Jay Adelson's repeated attempts to sell the company to News Corp., Current Media, and Google, at a valuation of $300 million or more, came to naught because there's no real business there. Those sales talks, while they were still under discussion, prompted entirely unfounded speculation that founder Kevin Rose was personally worth $60 million on paper. Instead, Digg took $28.7 million in venture capital at a valuation of almost half what the company hoped to sell for.

To be fair, that will last the company years, even at its current rate of red-ink spilling. But it's worth thinking about Digg's numbers amidst the litany of complaints about the ink-on-newsprint business: newspapers coast to coast are seeing devastating declines in advertising revenue. The New York Times has mortgaged its headquarters. The Tribune Company has declared bankruptcy. And yet, even in their decline, newspapers remain prodigious generators of cash. This moribund industry generated $13.7 billion in profit in 2007.

The same cannot be said of Digg, a site conceived by television host Kevin Rose as a replacement for the editors who pick headlines for readers. On Digg, readers vote headlines up by "digging" them, or down by "burying" them.

For now, Digg is safe, insulated from the marketplace as a well-funded private company. But if Adelson no longer plans to sell the company, he will have to take it public. And when the day comes that investors can vote the company's shares up or down, unless he can engineer a dramatic improvement in its finances, he and Rose will know what it feels like to be buried.