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Wednesday, July 23, 2008

Did Google Use Ad Planner to Gauge Digg Acquisition Value?

There is some discussion right now as to why Google would acquire Digg when they could "just build one" like AOL or Yahoo did. Sure, but Digg is also a brand, and as a result, it has users and traffic.

Plain and simple: Digg represents ad inventory. Google's business decision could largely be based on whether Digg funnels in well to Google's core economic engine. It's a lot easier to negotiate an ad placement scheme when you, um, own the site.

I checked out what Google Ad Planner had to say about Digg. (Talk about Google eating their own dog food... wonder if they looked at this too... :) ). With 65 million impressions a month, for the moment let's assume that Google could find buyers for this ad inventory even if it is seen as low value. At a $4 effective total CPM rate per page, that comes to $260,000/mo. or $3.1 million a year in ad revenue. Well, that would value Digg at 60 plus times revenues if it sold for $200 million.

Then again, at a $12 eCPM, assuming 100% growth in the year post acquisition, we'd be down to 10X revenues if Digg sold for $200 million - getting closer to sanity.

Perhaps Digg has some additional assets and value that make it worth $50+ million outside of pure revenue potential, but given the current revenue potential, you can see why most buyers would have needed to bargain the price down to the $100 million range, which is why a deal has not been done. Even Google would be doing Digg a favor shelling out $200 million, and they have plenty of leverage to whittle that down a bit, I would think.

Another motivator for Google, of course, would be to drive another small nail in the Microsoft online ads coffin, who have a current advertising arrangement with Digg. But making unprofitable acquisitions to spite each other is one of those things that is likely to put continued downward pressure on Microsoft's or Google's stock prices.

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Posted by Andrew Goodman




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