Digg: Is Bubble 2.0 Starting to Deflate?

On the heels of the collapse of print publishing, what if online media companies start failing, as well? Or, put another way, is Web 2.0 doomed just another bubble that will pop much as did the first dot.bomb?

Reporter Spencer E. Ante at Business Week obtained financial statements for Digg, and revealed a couple days ago that last year the company lost $2.8 million on $4.8 million in revenue. Furthermore, according to Ante, in the first three quarters of 2008, Digg's performance worsened, as it lost $4 million on $6.4 million in revenue. This translates into a loss of three out every four new dollars in revenue -- not the trajectory any company hoping to achieve profitability wants to follow.

When you look at other Web 2.0 titans -- Facebook, YouTube, and MySpace -- monetization also has proved difficult, despite the enormous scale they've achieved in their user bases. With online advertising declining broadly the past two quarters, investors are increasingly wary of companies that cannot demonstrate a clear path to profitability. In this context, many of the Web 2.0 players have watched their market valuations steadily fall. Digg, for example, once on the sales block for a reported $300 million, more recently booked an investment that implicitly shaved that book value almost in half, to around $167 million.

Many, if not most of these companies still have plenty of cash to turn their fates around, because up until recently they have been successful at attracting venture capital. But, given the likely length and depth of the current recession, V.C. money may well be the next pool to dry up. If so, we've all seen how this movie ends before -- back in 2000-02, as many of the first generation of websites collapsed and were consigned to the digital dustbins of history.