Sure, start scoffing. But Digg's past acquisition talks with Current and News Corp. failed in part because they looked at Digg as a media play, and community-generated sites like Digg aren't particularly attractive to advertisers. More recently, Digg and Google got close to an acquisition. That deal fell apart, according to a source familiar with the talks, because Google wanted to closely probe the quality of Digg's engineering staff early on in the deal, and Digg did not relent until talks were well along. (Digg CEO Jay Adelson refused to comment on the company's talks with Google.) The lesson: Digg's not a media company, and not a technology company. It's something else altogether.

Who makes money off of online community? The surprising answer is Amazon. One study suggests that Amazon.com makes $2.7 billion — billion! — a year in incremental sales because of its user-written reviews. Amazon uses the simple mechanism of asking shoppers if a review was helpful to rank its reviews.

It's remarkably similar to Digg's option of "digging" or "burying" a news story. Where might that be useful? Amazon.com's Kindle e-book reader. In addition to selling digital books, Amazon already charges for some news feeds available for free on the Web. Magazine and newspaper editors are delusionally optimistic that they might be able to charge by the article on a device like the Kindle, through a scheme of micropayments.

Micropayments have been technically possible for more than a decade. The problem has always been consumer behavior: How do you know if an article is worth paying for? The time spent pondering that question isn't worth the nickel people hope to charge for it.

But what if you didn't have to ponder that question? What if you knew, through Digg's rating system, that a large number of people had read the story and given it a thumbs-up?

An Amazon-owned Digg wouldn't have to charge for access to its website or the stories it links to; indeed, that would be against its interests, since the rating activity on Digg requires free access to work. The Wall Street Journal even gives Digg users free access to its stories so they can read them and vote.

Instead, Digg would charge Kindle users for a new service which delivers a personalized newspaper to the device — a service far quicker and simpler than the cumbersome process of going to Digg.com and scrolling through endless lists of popular headlines. They'd only pay for the stories they read — which in turn would provide more valuable feedback on what Amazon can charge for. The payment would be essentially voluntary, since readers could always pull up publishers' websites and read the stories for free there — but they payment would be more for the simplicity and ease of use, rather than the content itself. (Arguably, that's why people pay for music on iTunes rather than download it from file-sharing networks.)

Is Amazon.com thinking about such a move? We haven't heard anything about talks between Amazon.com and Digg. But, intriguingly, we heard whispers that Amazon.com is talking to Twitter. Amazon CEO Jeff Bezos is a personal investor in Twitter. Presumably, the attraction would be the same: getting some kind of real-time pulse on what people are interested in.

But Digg's focus on headline voting and Amazon's push into news distribution make them seem like a better match. Will Bezos dig the idea?

(Photoillustration by Richard Blakeley)

Digg, as of last fall, was losing money at the rate of $5 million a year. Its payroll has grown since then; cutting 8 people is unlikely to save it much more than $800,000 a year. At best, the layoff might get Digg back to its 2008 pace of losses.

So the site badly needs to increase its revenues. And there's the problem.

Kevin Rose, the podcast host known for his aggressive dating habits and on-air drinking who founded Digg, always wanted to focus on Digg's features and community, and let someone else figure out how to make money. That someone was first Federated Media, an online ad agency which favors quirky, ethically questionable endorsement deals, and later Microsoft, which has been so desperate to get into the social-media business that it has favored startups like Digg and Facebook with long-term, multimillion-dollar advertising guarantees. Keep in mind, though, that Digg has been running a loss even with Microsoft's guaranteed payments.

Only now, Adelson discloses in his blog post announcing the layoffs, will Digg start hiring its own salespeople. If he thinks that he will hire a salesperson and just magically add revenue, he is badly deluded. Even a good salesperson typically takes a year to get profitable. If he starts hiring now, it's reasonable to assume his expenses will rise through 2010, without revenue to offset them.

And then there's the advertising market itself. Demand is weak, and likely to get weaker; the advertising recession, if it follows past patterns, will outlast the actual recession. And in recessionary times, marketers tend to spend their budgets on direct-response ads like Google search, where the link between dollars spent and sales generated is clear. Experimental branding plays, like putting ads on an insult-laced site for Linux-obsessed fanboys, go into deep freeze.

Adelson, a veteran of several Internet businesses who saw technology's last boom and bust cycle, does not strike me as naive. He must realize that the financial scenario he laid out is utter nonsense. He is surely not promising profitability by the end of 2009 to the investors who just put $28.7 million into the company.

His fantasy profit scenario must be a message of reassurance for Digg's users, lest they panic over the layoff news. Does he think they're stupid and can't do basic math? Apparently, yes. Don't tell Digg's advertisers that.

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.

The obvious goal of the blog post is to advertise Digg's available jobs to prospective engineers. But in so doing, Adelson's alerting everyone to Digg's ever-expanding payroll expense — without talking up where the money is coming from. Digg has a sweetheart advertising deal with Microsoft, which sells ads for the site — but it hasn't found a revenue model of its own.

And Digg has a management problem which will only get more obvious as the company swells. Adelson, who commutes to Digg's San Francisco headquarters from his home in upstate New York, has admitted that he's not as committed to the company as he could be, having been burnt at a previous startup, Equinix. Founder Kevin Rose, who still commands considerable respect among Digg's contentious users, has made it plain he's not interested in running a big company and taking it public. It's hard to picture Rose and Adelson staying if Digg is sincere about getting big.

Rule No. 1: Convince the video's participants that the end product will be less embarrassing if they don't worry about being embarrassed while they make it. Get your people to either commit themselves fully to the project, or stay out of the way. Vimeo's companywide lip synch of Harvey Danger's "Flagpole Sitta" wouldn't work nearly so well if the girl listening to her iPod at the beginning didn't keep such a straight face. Know what else doesn't hurt? Actually memorizing the lyrics.

Rule No. 2: Get the heavies involved. Digg's "Groove Is In The Heart" from Mark Trammell wouldn't be nearly so worth watching if CEO Jay Adelson didn't start rapping two minutes in. Tocquigny's video featured only interns, making it seem like the real executives didn't take the PR project seriously. What kind of example does that set for the monkey-see-monkey-do younguns?

Rule No. 3: Plan meticulously and practice. Here's "L'amour a la française" from AOL France. Note how precisely the performers hit their marks. Note how cleverly new singers appear on the screen. That's dedication, people! (It probably didn't hurt that the most of these people knew they were about to be laid off and probably spent most of their remaining time working on this video.)

Rule No. 4: Learn to edit. Facebook code monkeys — here dressed as White Ninjas for the company's annual games day festivities — aren't actually supersneaky ninjas; that they appear as such comes from careful editing. A hint: Editing usually takes longer than filming.

Rule No. 5: Feature the most attractive coworkers prominently. Sure, a companywide video will probably include everyone from the company. But give the longest shots to the most attractive office-workers, like the girl listening to the iPod at the beginning of the Vimeo video or the swirling blonde in the middle of the video below made by Leonardo Dalessandri's production company, "Tambureddu." Also, be a little cynical and use a frame from one of those shots for the clips' still frame, which will appear in searches and embedded placements in blogs.

Shortly thereafter, reearsh firm Hitwise ran numbers which showed that Digg would be inconsequential for Google's traffic, only the 13th largest Web property, well behind Google News. Coincidence? Perhaps, but they can't have been helpful for Digg's negotiations.

One other sign that the deal has been going nowhere: Digg has been interviewing for a head of PR. That's a position they wouldn't fill if they were close to a sale. That said, we hear Digg board member Brett Bullington, who helped sell JotSpot to Google in 2006, has been pushing to keep negotiations alive.

So are things on? Are they off? Never say never in deals. But even Digg CEO Jay Adelson acknowledged this week, at a meetup with Digg users in Chicago, that his company has been too prone to leaks during negotiations. Could he be getting a taste of the same from the Google side? That's a theory I dig.

(Photo of Rose by Brian Solis/Bub.blicio.us)

Adelson said the move will open Digg up to new verticals and make it possible for stories that wouldn’t make the cut on the main Digg site to find an audience. Users will be able to control the threshold for submitted articles being promoted to the front page of these.

What struck me about Hansell's piece was the use of a file photo that features a wildly grinning and unbelievably baby-faced Adelson — with professionally trimmed hair, no less! Looks a little too much like a certain viral movie marketing campaign to be a coincidence. Is the gray lady secretly synergizing with News Corp. on the latest Dark Knight release and subtly Joker-izing Adelson?

What's interesting is the timing. A source familiar with the talks says Google and Digg reached an agreement last month; it's not clear whether the offer was verbal or a formal termsheet. So why the delay? One possibility: Digg may have been exploring whether it could hire a rock-star CEO and raise more money. Adelson has long been flying cross-country, twice a month, to San Francisco from his upstate New York home, and privately complains about the commute to friends. But so far, I've heard nothing about Digg raising a new venture-capital round, or Adelson making way for a higher-profile hire.

Of Digg's possible acquirers, Google is the company's most natural home — despite Digg having a multiyear advertising contract with Microsoft. Google desperately wants to get a handle on social networking; it has struggled to sell ads profitably on News Corp.'s MySpace. More importantly, Digg could help Google improve the relevancy of its search results, especially with the news articles Digg readers vote on and discuss so vociferously. That might be worth more to Google than any ads it might manage to sell on the site.

The deal may not happen. Insiders are already mystified by its lack of progress since word first started spreading last month. As Sarah Lacy revealed in Once You're Lucky, Twice You're Good, Digg has held a series of deal discussions that never came to fruition. That history makes it hard to take any new Digg-sale rumor seriously. But we hear these discussions are close enough to take seriously. Cupcakes, anyone?

(Photo of Rose by Brian Solis/Bub.blicio.us; cupcakes by a_cooper)

(Photos by NewYorkInsider and NYFoundersClub)

Photos by Randal Alan Smith

Digg Dubb: Groove Is In The Heart from Trammell on Vimeo.