My Thoughts on Digg Ads: Market Design is Key

Yesterday it was announced that Digg, in an effort to begin generating positive cash flows, was launching an a user controlled ad system.

From Mashable:

Today, the company may have just revealed their big ace-in-the-hole for bringing in the revenue: a new ad platform called Digg Ads that will let users control which ads appear on the website by voting up or burying ads.

According to Digg, the more a user votes up an ad, the less costly the ad is for the advertiser. So, maybe if you get 100 diggs, your ad costs only half as much. On the other hand, an avalanche of buries will make advertising cost so much that you’ll be kicked out of the system. The ads must appeal to Digg users, which hopefully will make these ads more acceptable to Digg’s core user base.

Digg is basically a well-designed market for news.  It quite effectively solves a problem, which is “What are the best stories on the internet?”.  Upon an initial Digg (similar to an IPO), a user launches a story in the Digg market and the market comes together and “values” a story in Diggs.   This works because there is a demand for the story.

Ads are a bit trickier.  There is very little, if any,  demand for ads out there on the internet.  On top of that you have three different parties trying to solve three seperate problems in the same market.  Digg users are trying to solve the problem, “What are the best stories out there?” and I would think they are not too concerned with resolving Digg’s problem, “How can we maximize Ad Revenue?”, nor are they too concerned with the advertiser’s problem, “How can I maximize product visibility?”.  As Ben Parr puts it in the Mashable story, “will diggers mass-bury every ad that appears?”.  That is surely a concern.  Buried ads cost advertisers more and will eventually get wiped off the system.  By combining the two markets it will be quite difficult to solve all three problems at once.

In order to be succesful the market for ads needs to be designed differently.  While I don’t know the intracacies of the market design, here are a few suggestions I have:

  1. Digg levels should be auctioned off. Since original placement is key, Digg should value add placement amongst a certain level of “dugg” stories.  An add placed amongst stories with 500 Diggs should be a much different price than an add placed amongst stories with 50 Diggs.  I assume they are doing something like this already, but if they aren’t they should.
  2. There should only be Digg Ups.  Since users are inherently indifferent towards ads, giving them an option to “Digg Down”, or bury is redundant.  I would assume most users wouldn’t Digg at all so a “No Digg” is essentially a Digg Down.  This puts more value on the initial auction and allows Digg to offer value added ad revenue reduction through its market place.  It allows Digg and its advertisers to set a maximum price away from the market, which simplifies the process a great deal.
  3. A seperate Ad Market Should be launched.  Digg should investigate a seperate market where users have the sole responsibility of solving the problem, “What is the best ad?”.  The market would designed similar to the Digg Marketplace, where each ad only starts off with at effectively zero.  Users are then are asked to Digg the best ads, and earn points if they Digg ads that are Dugg by more users.  These points can then be used towards discounts at the very advertisers that use the Digg marketplace.  By turning it into a game, they are giving the advertisers visibility, and also generating warm leads towards sales.  In addition, they are giving users an incentive to watch ads and to spread ads virally.  This would work well if done correctly.

It will be interesting to see how this pans out, but I believe in order to be successful, market design will be key.

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