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How Digg Found a Way to Make Money

Social networking behavior—endless repetitive page views, unvetted content—isn't a great fit for traditional forms of online advertising. Early attempts to bring search or brand ads onto sites like MySpace and Facebook had pathetic results compared with the trajectories of the sites' popularity and attention. But now, a few years in, social media companies are starting to discover how to advertise to their own audience. And in the last five months, Digg has figured out a model that makes sense. So much so that its new site-specific ad formats already account for more than a third of its revenue.

Digg, through its savvy users' curating of news, facilitates tons of page views, comments, and clicks to publishers' sites, but as we here at the GigaOM network have seen firsthand, such bursts of traffic do nothing for advertisers' click-through rates (CTR). So the company last year launched a program called Digg Ads (it kicked off with paying customers in October) in which advertisers submit or sponsor content with the look and feel of Digg. The company's publisher and chief revenue officer, Chas Edwards, who came to Digg from Federated Media, told us that it realized that its "local language" is blue headlines and yellow vote boxes. So now ads are made in the "vernacular" of Digg.

Five months in, Digg Ads are contributing 25%-30% of the company's revenue, said Edwards.The site also runs Digg-looking ads in its standard Interactive Advertising Bureau (IAB) spots, bringing in about another 10% of its revenue.The company doubled its revenue in 2009, becoming profitable on an EBITDA basis, and expects to do the same or better this year, according to Edwards.

While Digg—which has an 11-person sales team and uses Microsoft to sell its remnant inventory—had initially thought Digg Ads, with their cheap cost-per-click pricing, would be most useful for e-commerce advertisers like Best Buy (BBY) and eBay (EBAY), that changed quickly out of the gate. Now, the big spenders are brand advertisers from sectors like automotive, entertainment, and financial services—the folks who would traditionally be running banner ads and the like, said Edwards.

Telling CTR Spread

Digg Ads as a whole see about a 1% click-through rate, but what's interesting is the spread between more successful ads and less successful ones. Campaigns that mimic the style of Digg—using a numbered list, for example, or pointing to articles rather than product information—were much more effective, with up to 4% CTRs compared with 0.3% or 0.4% for the worst-performing Digg Ads. Toyota (TM), for example, ran 16 different creatives for a Prius campaign with Digg (this was before the recall), said Edwards, with one of the most successful being a link to a Toyota-sponsored eHow article on "10 Tips from Happy People." Of course, how many cars were actually sold through the promotion (and perhaps later recalled), we don't know.

Alongside sponsored story submissions, Digg also invites advertisers to buy ad units and fill them with relevant organic Digg content. So, for instance, in conjunction with CES in January, Intel (INTC) ran a package of the top-ranked stories out of the trade show that updated automatically within an ad unit on Digg's site. It was actually Intel that came up with the idea of running the same dynamic Digg units on other sites where Intel advertised, said Edwards, something Digg hopes will become standard practice. Overall, those ads get 0.9% CTRs in standard IAB units, said Edwards, up to 2% when put in a Unicast slider ad unit that comes across the page.

What's next for Digg, which at 40 million monthly uniques is a long ways from where it wants to be? As the site redesigns itself this spring to become a personalized news home page by harnessing more signals about what each member is interested in, targeted ads will follow, said Edwards. And the Digg Ad formats will come along for the ride, bringing in dynamic feeds of relevant sponsored stories.

Digg Ads, by definition, aren't the solution for every other social media site hankering to monetize, but other sites should also be able to find value by mimicking and blending in with their own particular mix of user activity and engagement. Which, if all goes well, will bring value not only to the companies' bank accounts but to their users' experiences, too.

Also from the GigaOM network:

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Liz Gannes covers the web for GigaOM.

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