Digg: A Case Study in Cost Control
December 20, 2008
In 1993, Chris Kitze and I created The Point (Top 5% of the Internet). Most people don’t know about this Web site. We sold it to Lycos a few years after opening for business. Now Lycos has gone out of business. Chris and I learned about Internet costs, and we were able to remain unstained by the red ink that many companies find ruining their sneakers. Flash forward 15 years, and the Digg story that carries such enticing headlines as “Digg’s Miserable business” and “Digg’s Sorry Revenue Stream” made me realize how little knowledge there is about Internet costs and the challenge of scaling a business in line with revenue or available capital. Digg, I want to point out, has venture backing and can operate at a loss for a while. But the news stories and the way the writers have addressed the fundamental issue–cost control–shows how some basic fundamentals can drag down an operation. My hope is that the losses or negative cash flow that Digg is experiencing will focus more attention on the challenge of Internet economics. Chris and I learned that traditional business school cost assumptions don’t work in some Internet centric functions. For example, one expects that over time, costs for hardware, software, and maintenance would stabilize and chug along with a reasonable and predictable annual growth rate. Wrong. Exogenous factors like a crash have to be fixed at once, which is expensive. Environmental changes such as a operating system software upgrade or an innovation have to be accommodated. Again the costs spike. Another example is what I call the burden of success. We started The Point, agreed to a specific amount of bandwidth, and then watched as our traffic surged on a daily basis. When the bandwidth bill came, we had to cover it. We did not expect that success translated into predatory pricing from our friendly service provider. Digg’s financial situation is instructive. I hope that its economics influence some of the budgeting that other young companies are doing as I write this post. In a meeting on Friday, December 19, 2008, one of my clients discussed financial assumptions with my team. The Digg example was instructive, and I think the business plan costs section will be reworked. Internet economics, not technology, tolls a death knell for many promising operations. Traditional MBA thinking has demonstrated it does not work in the broader economy, and it does not work for many individual operations.
Stephen Arnold, December 20, 2008
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[…] Digg: A Case Study in Cost Control […]
[…] I will be writing about cost analysis issues in 2009, and you may be interested in my recent post here about the financial hole in which Digg.com finds itself operating. The handling of the costs of […]
[…] Digg: A Case Study in Cost Control […]