First, it’s struggling with delivering unique value to its customers. When Digg launched in December 2004, it faced limited direct competition in the market of social media aggregation. Since its launch, Digg now competes with a myriad of services, such as Reddit (launched in 2005), Techmeme (2005), Huffington Post (2005), Newsvine (2006), and Hacker News (2007), just to name a few. There are now a huge variety of media aggregation websites targeting general and niche audiences. In addition to increased direct competition, Digg is now also facing a substitution threat posed by companies such as Facebook (2004), Twitter (2006), and Google Buzz (2010). An increasing number of consumers are turning to these services for their daily fill of news.
Second, Digg is struggling with an untenable cost structure. With about 72 employees before its reduction in staff, Digg has about 9x the number of employees of Reddit, a key competitor. Consider another competitor, the Huffingpost. It attracts about twice the number of visitors per month, employing a full-time staff of just 60. Commentators have also noted that Digg had unusually high infrastructure costs, although I suspect they have remedied some of these issues since these reports. With revenue of just $15 million, and a unsustainable cost structure, Digg is currently operating at a loss.
For Digg to survive and prosper into the future, it must refocus and develop a service that delivers unique value relative to the many competing services that are currently available. Given the range of competition, it’s not clear what Digg can change to deliver unique value. Next, Digg must continue to reduce its cost structure by reducing its human resource and infrastructure costs. Needless to say, increasing value for customers while reducing costs is a difficult challenge.