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Why Digg Should Buy StumbleUpon

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From left: StumbleUpon Backers Brad O'Neill and Ron Conway with founder Garrett Camp. (Photo: Om Malik.)
From left: StumbleUpon Backers Brad O'Neill and Ron Conway with founder Garrett Camp. (Photo: Om Malik.)

Over the past few weeks, speculation has surfaced that StumbleUpon, a social media utility that was acquired by eBay (s ebay) in April 2007 for around $75 million, was back on the market. But as TechCrunch, which first reported the story citing an unnamed source “with knowledge of the sale process,” noted late last week, eBay isn’t willing to lose money on its purchase of the toolbar maker that enables the collaborative discovery and recommendation of web sites.

From what I’ve been able to glean from various sources, it’s safe to assume that StumbleUpon is making between $5 million and $7.5 million in annual revenues, and there maybe some profits involved. A sale at $75 million values StumbleUpon at 10 to 15 times those revenues, not such an outrageous amount in normal times. [digg=]

But these are not normal times. In this current economic climate, eBay is going to have a tough time finding a buyer, never mind one that would be willing to pay such a price. Barry Diller’s IAC has been floated as a possible acquirer, but that is little more than a highly unlikely suggestion.

While I wanted to hound StumbleUpon founder Garrett Camp for information when I attended his big birthday bash in San Francisco, he (understandably) had other things on his mind. Nevertheless, seeing him got me thinking about how, when it comes to StumbleUpon, eBay could have its cake and eat it, too.

The way to do that is simple — by selling it to Digg in exchange for equity in the combined entity. Before you call me crazy, hear me out.

Despite all the hoopla around social media, only Digg and StumbleUpon have been breakout hits. A combination of the two would create a social media powerhouse that would be hard to beat. With its ability to find and curate some of the most popular online content into various categories, Digg has a presence on the web that few can match. The problem with Digg is that despite its efforts to expand into other verticals (such as politics), it is still too technology-centric. And the most popular stories don’t necessarily mean the best or most relevant content.

Small but Smart

In sharp contrast, StumbleUpon, thanks to its toolbar, has better content from many different verticals. Sure it has a smaller footprint, but experts believe that StumbleUpon visitors have a higher degree of intent when compared to other social media sites, as evidenced by their constant curation of content.

As far as StumbleUpon users are concerned, its toolbar provides more useful and productive results than even Google. That’s one of the main reasons why eBay’s tiny division is able to generate revenues by embedding ads between the various pages it serves up. (StumbleUpon embeds sponsor sites into some of its search results, which provides better returns for advertisers since it lands on a sponsor’s page instead of users having to click on an ad, be it a banner or a link.)

Is 1+1 = 11?

The combination of the two companies would allow them to put together an enviable index of the web, which when married to a smart contextual advertising system could prove to be an effective ad channel.

More importantly, we are living in the age of information excess. To date, search engines have crawled the web, sifted through the data and served up search results. Google, thanks to its black-box formula, has done a good job of this.

Of course, that takes a lot of computing horsepower and (nearly all of) the world’s search scientists. Even that is not enough, because we are creating more information than ever before. Muddying the waters is the emergence of video, and here traditional search doesn’t quite work. Digg and StumbleUpon both recognize this, and have applied large-scale human intervention in order to get a better handle on video content.

Alistair Croll, who writes for us on a regular basis, in a recent email to me pointed out that one of the reasons why Google launched a browser (in addition to a toolbar) is because “…the Achilles heel of search engines is their inability to see an increasingly dynamic, increasingly personal, increasingly secured, increasingly transient web without piggybacking on end users.” A Digg-StumbleUpon combo would have that edge over traditional search engines, making the combined company a likely buyout candidate.

Can the deal be done?

Digg’s current valuation, after a recent recent $28 million round of funding, is rumored to be around $175 million. From that perspective, the deal looks expensive and unlikely; it would make the current Digg investors hesitant when it comes to giving up a big portion of their company. They might want to reconsider their conservatism, however, for the combined entity would be attractive to any company looking to get a piece of the search-advertising market — starting with Microsoft. Barring that, however, it could build a strong ad-based business on its own.

Digg CEO Jay Adelson should pick up the phone and call eBay!

13 Responses to “Why Digg Should Buy StumbleUpon”

  1. It wont be so good. Maybe the biggest competitor for digg is stumbleupon. If digg buys stumble then it’ll remain just mixx, reddit and It’s not enough for a good competition in this domain.

  2. Thanks for the link back Om. Digg purchasing StumbleUpon would be a good idea, but Digg hasn’t penetrated the in-site, value-add reccomendation system that Stumble wants to go after now. I still think Diller might be able to pick this thing up on the cheap and reap the benefits of the new strategy. Digg has too much on their plate to work with Stumble, which may be way worse off than we think and could be a headache for Jay and Kevin.

  3. @Om,

    I am not suggesting that EBay sell SU for pennies on the dollar. In fact, EBay couldn’t pick a worse time for an asset liquidation. I’m simply saying that your analysis, sound in rationale, is simply not feasible in the current market conditions. I am not offering an alternative scenario for EBay and SU as I don’t know what EBay is planning strategically – though I’d recommend an additional round of financing (perhaps mezzanine) to complement your analysis for financial feasibility. Digg should hold on to its’ recent cash raised plus consider an additional round which could facilitate your recommended scenario and provide EBay with at least some liquidity. This way, the combined Digg/SU entity would improve upon Digg’s current revenue and free cash flow growth, while reducing SU overhead.

    I also believe that a CPM nuclear winter is eminent, and many web 2.0 entities are facing a moment of truth.



  4. @Curtis

    So the only option facing Ebay is to sell it for pennies on a dollar. They paid about $50 million for this. They be lucky to get 4 times sales in the near future. So what i am suggesting is that they instead try and work with Digg to get something done.

    As far as Digg is concerned, they are going to face a moment of truth because their entire business depends on CPM based advertising and this is precisely the moment for them to do something bold. they have the money to innovate out of the downturn.

  5. @Om,

    As much as I always enjoy your analysis, I think in this case you’ve missed the “elephant in the room”. EBay’s auction business has flatlined, and it normally generates a healthy free cash flow. Despite StumbleUpon’s short term performance issues, it is doubtful that SU can make up for the current decline in EBay’s free cash flow. This concern combined with the global credit crisis likely means EBay wants cash for SU and cash only. An equity swap likely isn’t worth the risk in today’s recessionary environment.

    I see your logic, which I think has merit. Unfortunately, in this climate equity swaps are much too risky.



  6. I think you’re all kidding yourselves if you think its even remotely possible to combine the radically different businesses, algorithms, dev teams, management approaches and cultures of these two small companies and get anything other than an epic fiasco.
    There is no logical point of meaningful tech integration at a code level. And if you know developers at either of these two companies, you’ll know they’re teams both notorious for being extremely talented hacks, resistant to traditional frameworks. Unfortunately, when you combine to legacy apps, you need framework oriented teams to succeed.

    Cool thought exercise, but it would be a distraction to the efficiency of both companies.

  7. @Mark Evans

    In theory I think this is a deal which makes absolute sense and the companies have to figure out a way to do this deal. It is in eBay’s best interest that they merge with Digg and wait for the outcome ala VMWare and EMC. I think together these guys are going to be formidable/

    At the valuation Digg is getting, it is a paramount that investors think about this opportunity and run the social news site like a grown up technology company.

  8. Om,

    In theory, a StumbleUpon-Digg deal makes sense. There’s good synergy in terms of two services focus on content discovery. But I just don’t think has the financial resources to make it happen. My sense is its investors want Digg to focus on organic growth rather than expending its money and energy digesting an acquisition – even one as tempting as StumbleUpon.


  9. Good call, Om.

    Helps Digg grow into other vertical segments, gains them browser runtime real estate from which they could grow out more of a platform play. Plus, that type of user (i.e., ones who’ve downloaded a companion app) tends to be more engaged than web only users.

    I don’t know if the economics could be worked out, although given all of the fear in the market, and the resultant lack of M&A frothiness, there is probably a decent arbitrage for a private buyer like Digg to score from a motivated public seller looking to shed an asset sooner than later.