Will statistics mess kill Digg acquisition by News Corp?

San Francisco news ranking start-up Digg has become a symbol of new-age Internet buzz, ever since its hyped cover story on BusinessWeek several weeks ago.

Now TechCrunch reports Digg has been in recent acquisition discussions with a number of companies, including News Corp. — with a price of $150 million being discussed.

Rumors abound of a possible sale. BusinessWeek cited sources saying Digg was worth $200 million, but that value was so out of whack with Digg’s revenue and usership base that it was hard to find credible. That, combined with the article’s other errors (partly documented in the comments), put the whole story into question. See this Red Herring piece, which suggests that based on a both user numbers and rules of thumb concerning value as related to revenue, the $200 million number is way too high, when compared to the MySpace acquisition.

Or was it? This is where we get into the game of unreliable statistics, and it gets extremely frustrating. If we don’t get more standards on stats, the industry will suffer.

Techcrunch caught word of early Google talks with YouTube, but it has caught word of other rumors that haven’t panned out. More notable, though, is its reference to the unreliability of traffic statistics. Specifically, it suggests Digg’s claim to have 20 million unique monthly visitors has created a bone of contention in the acquisition talks. Comscore shows Digg has only 1.3M uniques. As a result, the article suggests, Digg wasn’t able to get its bottom line demand of $150 million. Instead, the article concludes, Digg may decide to raise $5 million + from its backers, possibly Greylock Partners.

Now, when Google bought YouTube for $1.6 billion, it was such a huge bet on the future of video that accuracy of statistics for YouTube usership may not have played a big role. Everyone knows YouTube is the biggest, and even if your measurement is one or two degrees off, you are going to do a deal based on basic hunches and not on whether video traffic today is at 30 or 35 percent market share.

But then there’s the other thing you can do, if you are really interested in buying a company — and it’s presumbably what News Corp and others did with Digg. You take a look at the targeted company’s own server statistics — which the company will surely show you if you are serious about buying them. Yet even these statistics are being thrown into doubt. Take a look at this recent piece by BusinessWeek, written by one of the authors of the original Digg story, about how unreliable statistics are. It tells the story of Seth Sternberg, chief executive of online IM site, Meebo, offering Comscore access to his internal statistics and trying to convince Comscore that its estimates for Meebo’s traffic are too low — to no avail.

Techcrunch says Comscore’s data are notoriously unreliable. Singling them out is a little unfair. Comscore may be off, but everyone else is off too. And the reason Comscore has become more credible for some people is because it is more conservative. It doesn’t count any of the junk page views, such as ad pop-up ads, that a server may count, for example. Indeed, more advertisers are requesting Comscore data for this reason. And thus a game begins to get played. Advertisers like Comscore because they can pay less to sites if the data shows less traffic.

In other words, this statistics problem has become big. We’ve written about it before.

By the way, we checked with Digg about this latest acquisition rumor, and here’s Kevin Rose’s response, as sent through a spokesman:

After the YouTube buyout there have been so many rumors and speculation about the future of Digg that we’ve made the decision as a company to not respond to any of them. As always, we’re focused on execution and cranking out future versions of digg — you can expect many cool new features coming very soon.

Also, here’s more background on the valuation discussion, from Red Herring article:

To look at this another way, the $200-million valuation is roughly 66 times current revenue. Put in context, when News Corp. paid $580 million for Intermix, the parent company of MySpace, the offer was seven times company revenues—and News Corp.’s offer was called stratospheric at that time.

Users can be another benchmark of a company’s value. At the time of the News Corp. acquisition, MySpace parent Intermix had 27 million unique users, valuing the purchase at $21 per user.

By that measure, if Digg were acquired for $200 million with 1.35 million unique visitors, according to comScore Media Metrix’ traffic estimates, it would be valued at $148 per user.

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