Why Digg's Worth $200 Mllion or More to Google

Digg IPO? No. Digg FSBO. For Sale By Owner. Again.

The auction for social search engine Digg begins when Microsoft and Google make their bid. Both search engines are digging through Digg’s financials to see if they can make the numbers work. Microsoft signed a three year advertising deal with Digg last year. Microsoft’s guarantees providing the lion’s share of Digg’s revenue.

Did Steve Ballmer like his Digg advertising deal so much he decided to buy the company? Not at all. So who else might bid? Time Warner. NewsCorp. Round up the usual suspects.

TechCrunch reported this morning that two media titans are in the mix too for the fire sale prices being discussed. Mike Arrington notes this isn’t the first time there’s been due diligence with Digg. Last year the number was $300 million. This year? Only $200-$225 million.

Microsoft, expected to bid lower, may cancel their advertising deal if they lose out (again) in a bidding war with Google.

Blodget says “a knowledgeable SAI reader” values Digg at $100 million. In any case, Kevin Rose, Digg’s co-founder, must know his tech team can’t satisfy his customer base with the new Digg voting algorithm that essentially takes the social out of the social search engine.

Google would be able to design a superior Digg voting algorithm for the community; Digg apparently can’t.

Arrington observes that Google wouldn’t value Digg based on revenues. No surprise there. Google’s acquisition of YouTube as a video search engine wasn’t valued based on revenue either. Nor was Microsoft’s stake in Facebook.

For Google, the acquisition of Digg would have strategic value. Ask Google execs what the near-term future of search looks like and they’ll answer “social search.”

Digg would be an extension of Google’s search engine empire: Digg votes may become one more signal in the Google natural and paid search algorithms. Diggers voting for YouTube. A link is a vote in PageRank. Why wouldn’t a Digg vote be one too?

Google may have reduced PageRank for Digg-juiced sites that rose in natural search rankings due to Digg. No company knows the power of Digg better than Google.

It’s not about the short-term AdSense revenue all those Diggers would provide. It’s about their behavior: what they vote for and why.

Search behavior is the key driver behind Google’s acquisitions. The benefits of amassing a higher share of searches on the Internet accrues to Google. No one on Wall St. values a company based on the activities of its members.

But then no company before Google has ever built an empire as a global R&D lab.