• by Mark Walsh  @markfwal, January 23, 2009

Social news site Digg Thursday confirmed that it plans to lay off 10% of its 75-person workforce as part of wider efforts to make the company profitable in 2009.

The cutbacks come amid slowing audience growth at Digg and the broader pullback in online advertising that has led to staff reductions at hundreds of Internet and high-tech companies in recent months.

Among the steps toward achieving profitability outlined by Digg CEO Jay Adelson on the company blog Thursday were hiring a direct sales team, rolling out new features to expand its user community, building on its "advertising infrastructure" and ad partnership with Microsoft, and maintaining ongoing sponsorship opportunities.

"As we've often stated over the past couple of months, given the current economic climate, we've made the decision to take a more conservative approach to our expansion plans and aggressively focus on reaching profitability within the year," said Adelson in the statement.

The company declined to comment Thursday beyond the announcement.

Social media properties, not long ago the darlings of Silicon Valley investors, are under increasing pressure to demonstrate economic viability in the face of a deepening recession threatening their nascent business models.

The most prominent of a category of social sites that allow users to share and rate the importance of news stories, Digg has seen its traffic flatten over the last year. The site drew 6.8 million U.S. unique visitors in December 2008, up only 13% from 6 million in the year-earlier period. Quantcast estimates its worldwide audience at 23.8 million.

Compare that to Facebook, which had 54 million U.S. unique visitors in December, up nearly 60% from 34.7 million a year ago. Web measurement service Compete also reported this week that Digg had been edged out for the first time in audience share last week by Twitter, the latest social media sensation.

Digg founder Kevin Rose recently stated that the company had doubled its user base to 35 million in the last year.

Regardless of size, social networking sites have struggled to monetize their audiences because of marketer unease with user-generated content, a lack of specialized metrics, and the sheer amount of inventory they represent.

To build ad revenue, Digg in 2007 entered into a three-year deal with Microsoft to exclusively handle its contextual display and text advertising on the site. But it has not ventured much beyond that initiative, failing to explore new ad formats or ad programs as aggressively as larger rivals such as Facebook and MySpace.

Meanwhile, average display ad CPMs have dropped by almost half to 26 cents in the last year, according to PubMatic's AdPrice Index.

"Obviously, (Digg) has to get more creative and push the envelope," said Paul Verna, a senior analyst at eMarketer. "Maybe that means they're going to have to go more mainstream or form partnerships with sites that will steer more advertising-friendly content to the site."

According to a BusinessWeek story in December, Digg has started advertising on RSS feeds and is poised to relaunch its homegrown search engine to produce more relevant results. The company is also reportedly close to a deal with a mobile ad provider to sell more ads on cell phones.

Marketers may shy away from social networks this year in favor of proven types of online advertising such as search marketing and direct-response placements. EMarketer has already revised downward its estimate for advertising on social networks in 2009 to $1.3 billion, from $1.8 billion.

Without a direct sales team to date, Digg has also had little presence on Madison Avenue. "They are barely on the radar for most buyers," said Adam Kasper, senior vice president, director of digital media, at Havas' Media Contacts unit. "To be honest, I have never even heard from them." He added that the company hiring its own sales force may change that.

Digg has long been mentioned, however, as a potential acquisition target for the likes of Microsoft and Google. But finding a buyer now will be more challenging as larger companies balk at paying steep prices for Internet startups with little revenue and untested business models.

The total dollar value of online media M&A transactions in 2008 fell 62% to $16.9 billion, according to a recent study by investment bank Peachtree Media Advisors.