Business Week on Digg: Smells like bubble spirit

Kevin Rose on Business Week cover

Late last night I clicked on a link to the new Business Week cover story about Digg and its founder, Kevin Rose, and read the cover’s headline: “How this kid made $60 million in 18 months.” Gee, I thought, bleary-eyed, I guess I missed the story about how they sold the company. Good for them.

This morning I started reading the piece, and, after scanning quickly through it hunting for the graph about how Digg had sold out and to whom, realized that the $60 million figure was not the proceeds from a sale, and not even a valuation that a prospective buyer had offered, but an almost entirely fictional number.

Was it something that some irresponsible coverline writer had slapped on the piece, that the responsible writer was horrified to see? I don’t think so. The second paragraph of the article, referring to a recent redesign of the Digg site, reads: “At 29, Rose was on his way either to a cool $60 million or to total failure.”

The $60 million number is never explained in the piece; the only real numbers are contained in this sentence: “So far, Digg is breaking even on an estimated $3 million annually in revenues. Nonetheless, people in the know say Digg is easily worth $200 million.” Elsewhere the article says Rose owns 30 to 40 percent of the company. Hence, $60 million.

There is a word for this kind of business journalism, and it is: awful. The reader has no idea who these “people in the know” are; they could easily be people associated with the company who have an interest in inflating its worth.

There’s no question that Digg is a successful site that might be on its way to building a real business. It might be worth more than $200 million someday. I’m not slighting them in any way; I’ve been visiting the site almost since it started. But plastering imaginary dollar figures on its forehead is not the way to help Rose and his colleagues build a real business. “On paper” means just that. “People in the know” can say whatever they want, but your business, like your house, is only worth what someone is actually willing to pay for it.

The Business Week piece itself acknowledges this in places: “This time around, the entrepreneurs worry that, within a moment, the money — and their projects — could vanish… it’s still only paper wealth, which [Rose] and many others have learned can evaporate.”

Right. So why is Business Week insisting that Rose has made $60 million? If this callow 29-year-old understand that it’s “only paper,” why are the editors of one of our best-known business journals being so stupid about it?

Techdirt calls the article “the ultimate Web 2.0 hype piece,” but I think it’s not even that up to date; it’s the same old dotcom-bubble piece dragged from the attic and retrofitted for today’s Web. It is just as mindless about the nature and meaning of company valuations as the dumbest purchaser of TheGlobe.com IPO shares was.

POSTSCRIPT: Jason Fried of 37Signals comes at Business Week from the perspective of a successful entrepreneur who is also a member of the tech industry’s reality-based community.
[tags]digg, web2.0, bubble[/tags]

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Comments

  1. Amen! The real winners will stay focused on building solid companies, with real customers, and real businesses while the media try to sell mags with sensationalism. The 37Signals folks had another great post about this…ironically in my opinion they are a great example of a “Web 2.0″ comapny building a real business that has significant value…

  2. Jessi Hempel

    Hey Scott, thanks for the critique. A note on where we got $60 million: it represented kevin’s estimated share of the valuation. The valuation itself came from a grand array of Web 2.0 insiders as well as vc and banking types. It represents one fair measure of an asset at a point in time. We were very clear about that in the story.

    As for the piece, it was our attempt to chronicle the antics of a guy with a good idea in this moment of the valley’s ever evolving history. I’m a great Salon fan, and as such, I’d really like to know how you would have approached this story as well as the valuation issue.

  3. Galen Panger

    What’s even worse is that the headline trivializes why Digg is important in the first place. It’s about democracy; the profit (if it comes) is just a bonus. The cover photo and the headline seem out of line with what Rose has expressed as the reason for why he’s passionate about what he’s doing. Web 2.0 may be a big business opportunity, but it is an opportunity on top of the values embedded within these new ventures.

  4. Thanks for responding, Jessi. Here’s the thing: The issue isn’t how you got to $60 million — even though you don’t actually do that math for the reader, it can be figured out, as I did here and others have. The issue is how you (and even more so, the magazine cover) frame that number.

    The cover story says Rose has already made $60 million. The article says the site redesign put him “on his way” to “a cool $60 million.” But then one reads the fine print and we learn that (a) the number that represents Rose’s share of the company is an estimate and (b) the number that represents the value of the company is one that knowledgeable people have pulled out of a hat.

    I understand what you’re saying about “fair measure of an asset,” but when you’re running rough estimations on small private companies (that aren’t making a dime, or much more, yet!) shouldn’t those numbers be thrown around with way more caution? It’s an asset, sure, but rather illiquid, wouldn’t you say? — and, given the nature of the industry and the lack of a track record, a pretty volatile one, too? Does Business Week really equate “owning a portion of a fledgling private business that someone might conceivably buy for a hefty sum in the future — but might not” with “making [some specific sum of] money”?

    I simply can’t buy that. And I express my concern because it’s precisely this sort of thinking — and this sort of coverage — that led to the destructive process of the last Web industry bubble-and-bust.

  5. ROTFLMAO…someone from Salon bitching about an over-valued, under-monetized business. I guess we’ll have to wait for Kevin to lose $80-$100 million of his investor’s money before Digg joins the Salon elite (or maybe until Rose starts taking a salary as ridiculous as David Talbot was while pissing away all that money).

  6. Brian, as usual you’re bending yourself so far to take a jab at Salon that you lose hold of the actual situation here — which is that I’m not criticizing Digg at all, I happen to like the site and the company, I’m not even saying it’s “overvalued” (nor did I ever come close to discussing whether it is “undermonetized” or over monetized or whatever). I’m criticizing the Business Week coverage — which you’d understand if you actually read what I wrote instead of reverting to the old “Let’s complain about Salon’s financials” line (which was already getting tired back in 2003 or so).

Trackbacks

  1. If digg is worth 200 million then i’m a billionaire….

    This latest story on digg is laughable.   The founder of digg owns 30% of the company,  and is estimated to break even with 3 million a year in revenues.  Business week uses alexa data to measure how popular the site is,  says the company is worth…

  2. [...] Tekst powstał w oparciu o notki: “Don’t believe BusinessWeek’s bubble-math” Signal vs. Noise, “Business Week on Digg: Smells like bubble spirit” Wordyard i How Paul Scrivens, Mike Rundle, Colin Devroe, and Tyme White All Made Billions In 12 Months  [...]

  3. [...] BusinessWeek has a great article on the new face of the Silicon Valley entrepreneur. Their article focuses heavily on Digg and its founder Kevin Rose and portrays a thrilling success story chock full of inspiring quotes for budding netrepreneur superstars. There has been major controversy about the article’s claim that Kevin has “made” $60 million. Both Jason of 37Signals and Scott Rosenberg (cofounder of Salon) have called BusinessWeek on their flub, saying basically that a business is only worth what someone is willing to pay for it, not what some unspecified authority estimates it is worth. Both Jason and Scott are also quick to point out that they like Digg and this reporting flub isn’t their fault at all. Apart from the estimating flub, the rest of the article really is inspiring. Here are the best parts: [...]

  4. [...] We should also add this Last week, we were among those who were fairly shocked at BusinessWeek’s dreadful coverage of Digg. Despite what some folks at Digg and in the comments seemed to think, our piece was nothing against Digg at all — but it was about BusinessWeek’s reporting on the topic. They claimed Digg founder Kevin Rose had “made $60 million” when he’s done no such thing. A number of others have noticed the same thing. Rather than admitting to really shoddy reporting, it seems that the BusinessWeek team is trying to defend the article or claim that the reason people are upset is the breezy language used in the article. However, one thing is becoming clear: there were a few last minute changes that made this article seem a lot worse than it may have originally been. First, apparently those “higher up” pushed editors to change the cover and throw in the totally made up $60 million number at the last minute, replacing a slightly less ridiculous cover. [...]

  5. [...] I also heard through the grapvine Almost exactly three years ago, we had an article noting how many in the fashion industry, unlike the entertainment industry, had realized that a lack of intellectual property protection actually benefited them. While big name designers saw cheap knockoffs hit the shelves quickly, that only helped to drive more innovation. The designers would keep on innovating, trying to outdo each other, while building up their own brand reputation — which would justify some of the premium they charged for the “genuine article” (quality also plays a role in the price — the knockoffs generally aren’t nearly as well made). Many in the industry seemed to admit that it helped drive creativity and innovation — which seems like a great result. Unfortunately, however, some fashion designers have moved in the wrong direction since then. Last summer we had an article about how some designers were increasingly getting upset about the knockoff issue. It seems like this year it’s gone one step further. David Levine alerts us to a Wall Street Journal article about those in the industry now pushing for a change to copyright laws that would allow fashion designers to copyright their clothing designs. As people in the article note, this would have the effect of slowing down fashion innovation, because designers wouldn’t have to continue innovating. That’s the opposite goal of the intellectual property system — yet very few people seem willing to point this out. If you subscribe to the theory (as many people do) that the government should only intervene in markets where there is a clear market failure that needs to be corrected, then you have to question why this law would ever make sense. You have what is clearly a competitive industry that is making a ton of money and continues to thrive and innovate at a rapid pace. That’s great. Now, people want to introduce additional government regulation to slow down the rate of innovation by letting those already at the top of the market stop innovating and rest on their laurels. That doesn’t sound good for the overall industry, consumers or the economy. What a wonderfull idea how A Little Editing Inflated Some Web 2.0 Hype Last week, we were among those who were fairly shocked at BusinessWeek’s dreadful coverage of Digg. Despite what some folks at Digg and in the comments seemed to think, our piece was nothing against Digg at all — but it was about BusinessWeek’s reporting on the topic. They claimed Digg founder Kevin Rose had “made $60 million” when he’s done no such thing. A number of others have noticed the same thing. Rather than admitting to really shoddy reporting, it seems that the BusinessWeek team is trying to defend the article or claim that the reason people are upset is the breezy language used in the article. However, one thing is becoming clear: there were a few last minute changes that made this article seem a lot worse than it may have originally been. First, apparently those “higher up” pushed editors to change the cover and throw in the totally made up $60 million number at the last minute, replacing a slightly less ridiculous cover. [...]