Why Digg Should Buy StumbleUpon

From left: StumbleUpon Backers Brad O'Neill and Ron Conway with founder Garrett Camp. (Photo: Om Malik.)

From left: StumbleUpon Backers Brad O'Neill and Ron Conway with founder Garrett Camp. (Photo: Om Malik.)

Over the past few weeks, speculation has surfaced that StumbleUpon, a social media utility that was acquired by eBay (s ebay) in April 2007 for around $75 million, was back on the market. But as TechCrunch, which first reported the story citing an unnamed source “with knowledge of the sale process,” noted late last week, eBay isn’t willing to lose money on its purchase of the toolbar maker that enables the collaborative discovery and recommendation of web sites.

From what I’ve been able to glean from various sources, it’s safe to assume that StumbleUpon is making between $5 million and $7.5 million in annual revenues, and there maybe some profits involved. A sale at $75 million values StumbleUpon at 10 to 15 times those revenues, not such an outrageous amount in normal times. [digg=http://digg.com/tech_news/Why_Digg_Should_Buy_StumbleUpon]

But these are not normal times. In this current economic climate, eBay is going to have a tough time finding a buyer, never mind one that would be willing to pay such a price. Barry Diller’s IAC has been floated as a possible acquirer, but that is little more than a highly unlikely suggestion.

While I wanted to hound StumbleUpon founder Garrett Camp for information when I attended his big birthday bash in San Francisco, he (understandably) had other things on his mind. Nevertheless, seeing him got me thinking about how, when it comes to StumbleUpon, eBay could have its cake and eat it, too.

The way to do that is simple — by selling it to Digg in exchange for equity in the combined entity. Before you call me crazy, hear me out.

Despite all the hoopla around social media, only Digg and StumbleUpon have been breakout hits. A combination of the two would create a social media powerhouse that would be hard to beat. With its ability to find and curate some of the most popular online content into various categories, Digg has a presence on the web that few can match. The problem with Digg is that despite its efforts to expand into other verticals (such as politics), it is still too technology-centric. And the most popular stories don’t necessarily mean the best or most relevant content.

Small but Smart

In sharp contrast, StumbleUpon, thanks to its toolbar, has better content from many different verticals. Sure it has a smaller footprint, but experts believe that StumbleUpon visitors have a higher degree of intent when compared to other social media sites, as evidenced by their constant curation of content.

As far as StumbleUpon users are concerned, its toolbar provides more useful and productive results than even Google. That’s one of the main reasons why eBay’s tiny division is able to generate revenues by embedding ads between the various pages it serves up. (StumbleUpon embeds sponsor sites into some of its search results, which provides better returns for advertisers since it lands on a sponsor’s page instead of users having to click on an ad, be it a banner or a link.)

Is 1+1 = 11?

The combination of the two companies would allow them to put together an enviable index of the web, which when married to a smart contextual advertising system could prove to be an effective ad channel.

More importantly, we are living in the age of information excess. To date, search engines have crawled the web, sifted through the data and served up search results. Google, thanks to its black-box formula, has done a good job of this.

Of course, that takes a lot of computing horsepower and (nearly all of) the world’s search scientists. Even that is not enough, because we are creating more information than ever before. Muddying the waters is the emergence of video, and here traditional search doesn’t quite work. Digg and StumbleUpon both recognize this, and have applied large-scale human intervention in order to get a better handle on video content.

Alistair Croll, who writes for us on a regular basis, in a recent email to me pointed out that one of the reasons why Google launched a browser (in addition to a toolbar) is because “…the Achilles heel of search engines is their inability to see an increasingly dynamic, increasingly personal, increasingly secured, increasingly transient web without piggybacking on end users.” A Digg-StumbleUpon combo would have that edge over traditional search engines, making the combined company a likely buyout candidate.

Can the deal be done?

Digg’s current valuation, after a recent recent $28 million round of funding, is rumored to be around $175 million. From that perspective, the deal looks expensive and unlikely; it would make the current Digg investors hesitant when it comes to giving up a big portion of their company. They might want to reconsider their conservatism, however, for the combined entity would be attractive to any company looking to get a piece of the search-advertising market — starting with Microsoft. Barring that, however, it could build a strong ad-based business on its own.

Digg CEO Jay Adelson should pick up the phone and call eBay!