Don't count your Diggs before they hatch

This post began as a comment I was writing in response to an article on Jason Calcanis' blog entitled "Who should Digg sell to: Newscorp, Microsoft, or Google?".

It's one thing for two opposite sides of a negotiation to have reached an agreement in principle over a proposed sale -- one in which the price is off-the-table and only the final details are left to be worked out. It is a completely different situation when there are ongoing negotiations with occasional figures being tossed around, but where the two sides have not reached an agreement on price, in principle or otherwise.

I mention this because I see in Calcanis' article the potential here for a classic reminder of why you should never count your eggs before they're hatched. Admittedly I'm no industry insider, however amid all the hype that came with the recent announcement of Digg's rumored sale, there are a few details that stand out like a sore thumb.

The first and most glaring of these is the fact that the rumored price of $200 million is $100 million less than the figure that was circulating when these rumors popped up just over a year ago.

The second has to do with Digg's traffic and site usage patterns. Digg's traffic has been steadily declining for the last year and a half, as has the amount of time its users are spending on the site (source: Alexa).

Finally, the kicker in all of this is the new competitor that according to Alexa appears to be snatching up the majority of Digg's lost users and traffic while establishing themselves as the innovative leader within the social news realm, and generating ridiculous amounts of press coverage while doing so. For those new to the subject, I am referring to a six-month-old site that goes by the name of Mixx.

In just six months, Mixx has developed a thriving community on a site that is already serving a half-million unique visits each month.

Mixx has made no secret of its plans to attack and attempt to compete with Digg head-on; and the early returns on these efforts show an unprecedented success. Mixx continues to grow while Digg and Reddit are busy trying to find a way to stop the bleeding. Head-to-head gains aside, Mixx has been extremely successful in convincing people that it is for real, in a way marginalizing the other horses in the race.

As far as this pertains to Google or the others rumored to be interested in the social news giant, Mixx is a dangerous competitor that dramatically changes the dynamic of the competitive field, even before its traffic and user-base is large enough to justify the attention. Why is this? Because of Chris McGill.

McGill is not your typical college-student-turned-millionaire president of a popular web 2.0 site. In a field that is ripe with rich amateurs, McGill is unmistakably qualified to be competing at this level.

From Wikipedia: "The former head of strategy at USA TODAY, McGill previously served as the general manager of Yahoo! News where he oversaw the transformation of that site into the world’s largest online news outlet."

Make no mistake about it, Digg's prospective buyers are well-aware of this fact. They know the investment they are looking at will run well in excess of the actual sales price. Unfortunately for Digg, they have been unable demonstrate an ability to retain their existing users while putting a stop to Mixx's steady growth. This is undoubtedly one of the reasons the asking price has been slashed by 1/3, or $100 million.

To its credit, Digg did at least make an effort to retake the fort, but the algorithm changes intended to do just that blew up in its face by angering both the "power users" and the rest of the community without really motivating anyone to spend more time at Digg.

On top of all of these hurdles, Digg still has to contend with all of the many niche social media sites popping up left and right. Every day, sites like BigEasyLinks.com and HealthandWellnessArticles.com pop up in hopes of attracting a mere fraction of the communities found at sites like Digg and Mixx. For every one of these such sites that enters the marketplace, the uniqueness of the Digg concept deteriorates just a little.

From my outsider's perspective, it appears Google is expecting further price concessions. And why shouldn't they? Until Digg can show that the bleeding has stopped, their position within the market is secure, and that it is not just a matter of time until they are replaced by Mixx as top-dog; Google and the others would be wise to simply sit back and wait to see how far Digg's traffic will fall.