UPDATED 14:02 EST / JUNE 10 2009

Some Theories on How Digg’s Making Money.

Digg CEO Jay Adelson showed up yesterday to Fox Business channel to talk about the success that he’s having over at the company. Throughout the conversation, Jay seemed to sound a lot more bullish on newspapers than one would expect; perhaps a bit charitable, given the very dismal reality right now.

“I think we are little bit early [on calling the death of newspapers], and we will see consolidation,” said Adelson. “We will see more national brands, and fewer local brands, and over time, winners will move to the top.”

Liz Claman incredulously ended the interview with, “They make money – they actually make money.” It was amusing, particularly to me, since Digg has been one of the sites that’s looked as if it’s been continually on the take in terms of VC dollars for a number of years.  Interestingly, though, Jay said in the interview that he remains confident they’ll achieve profitability by the end of the year.

image Jay also threw out an intriguing quote: “We are getting 10-20 times the price for an ad that a social network will get.”  This is a surprising statistic given that eCPMs on social networks are directly comparable to blogs and other news sites, and as a blogger who’s worked for organizations that routinely got Dugg, I can confirm the general wisdom that Digg users don’t typically click on the ads – or much at all – when they come visit from Digg.

Running the Numbers
Let’s lay out the numbers and see if we can take Jay’s quote at face value.  Most blogs of respectable size (think Federated Media-level) are asking $20-40 CPM for their ads and getting an eCPM closer to $1.30-$2.50.  Those that undergo serious optimization routines can see levels as high as $15.00 eCPM, but that’s pretty rare, in my experience.

Meanwhile, social networks I’ve worked with and according to common wisdom, tend to receive eCPMs along the same range: between $.50 – $5.00, depending on how well the ads are placed and what targeting technology is used.

If Jay is to be believed, their special sauce targetting ads are receiving anywhere from $10 to $100 CPM. The lower end is moderately believable – in the ad network project that Sean P. Aune, Steven Hodson and I have been working with in conjunction with SiliconANGLE Labs has taken blogs that generally get $.80 eCPMs and get them as high as an $16.50 eCPM.

The upper end of that is completely unbelievable though – I would doubt that there’s any content site on the internet making $100 CPM from ads.

How is He Doing It?
image It’s hard to say – I frequently visit Digg for one reason or another, and the data they collect doesn’t seem particularly targeted based on the ads I’m generally served.  Most of them seem typical fare for Google AdSense graphical ads and the sort of thing you see on the Technorati ad network – which I can promise you isn’t pulling down $10 eCPM, much less a $100 eCPM.

In the interview, Adelson seemed to indicate that their ads functioned on behavioral profiling technology.

A little bit of targeting will go a long way.  When you set up your ad networks for sponsor buys, tagging and categorizing your ad units can increase profitability of that unit by five times – but switching to a network that can track cookies across many different sites can increase the targeting ability easily by ten fold. When you compare the eCPM returns of an ad network like AdSense that relies on context matching versus a network like VideoEgg that does behavioral matching, the difference is like night and day, and generally do reflect a difference of 10x.

Bottom Line: While the claims Jay made in the interview border on believable, he did drop some very interesting thoughts and windows to Digg’s future.  If Digg uses their “Digg It” widget and their toolbar to gather surfing data, their basis from which to make a behavioral match on ads greatly increases.

If that is indeed the path they’re going down, they may indeed reach profitability much sooner than any of us thought.

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