Digg, as of last fall, was losing money at the rate of $5 million a year. Its payroll has grown since then; cutting 8 people is unlikely to save it much more than $800,000 a year. At best, the layoff might get Digg back to its 2008 pace of losses.

So the site badly needs to increase its revenues. And there's the problem.

Kevin Rose, the podcast host known for his aggressive dating habits and on-air drinking who founded Digg, always wanted to focus on Digg's features and community, and let someone else figure out how to make money. That someone was first Federated Media, an online ad agency which favors quirky, ethically questionable endorsement deals, and later Microsoft, which has been so desperate to get into the social-media business that it has favored startups like Digg and Facebook with long-term, multimillion-dollar advertising guarantees. Keep in mind, though, that Digg has been running a loss even with Microsoft's guaranteed payments.

Only now, Adelson discloses in his blog post announcing the layoffs, will Digg start hiring its own salespeople. If he thinks that he will hire a salesperson and just magically add revenue, he is badly deluded. Even a good salesperson typically takes a year to get profitable. If he starts hiring now, it's reasonable to assume his expenses will rise through 2010, without revenue to offset them.

And then there's the advertising market itself. Demand is weak, and likely to get weaker; the advertising recession, if it follows past patterns, will outlast the actual recession. And in recessionary times, marketers tend to spend their budgets on direct-response ads like Google search, where the link between dollars spent and sales generated is clear. Experimental branding plays, like putting ads on an insult-laced site for Linux-obsessed fanboys, go into deep freeze.

Adelson, a veteran of several Internet businesses who saw technology's last boom and bust cycle, does not strike me as naive. He must realize that the financial scenario he laid out is utter nonsense. He is surely not promising profitability by the end of 2009 to the investors who just put $28.7 million into the company.

His fantasy profit scenario must be a message of reassurance for Digg's users, lest they panic over the layoff news. Does he think they're stupid and can't do basic math? Apparently, yes. Don't tell Digg's advertisers that.

BusinessWeek's Spencer Ante got ahold of Digg's financial statements. They are frightful, even for a startup. Last year, the company took in $4.8 million and spent $7.6 million, for a loss of $2.8 million. In the first nine months of this year, losses grew almost as fast as revenues: Digg took in $6.4 million and spent $10.4 million, resulting in a $4 million loss. At an annual clip, that's more than $5 million out the door a year.

Keep in mind that Digg has a lucrative three-year advertising deal with Microsoft, that pays the site a guaranteed rate for its inventory. Without that arrangement, struck last year — driven, most believe, by Microsoft executives' desperation to get in on the Web 2.0 craze — Digg's losses would likely be far worse.

Now it all makes sense: Digg CEO Jay Adelson's repeated attempts to sell the company to News Corp., Current Media, and Google, at a valuation of $300 million or more, came to naught because there's no real business there. Those sales talks, while they were still under discussion, prompted entirely unfounded speculation that founder Kevin Rose was personally worth $60 million on paper. Instead, Digg took $28.7 million in venture capital at a valuation of almost half what the company hoped to sell for.

To be fair, that will last the company years, even at its current rate of red-ink spilling. But it's worth thinking about Digg's numbers amidst the litany of complaints about the ink-on-newsprint business: newspapers coast to coast are seeing devastating declines in advertising revenue. The New York Times has mortgaged its headquarters. The Tribune Company has declared bankruptcy. And yet, even in their decline, newspapers remain prodigious generators of cash. This moribund industry generated $13.7 billion in profit in 2007.

The same cannot be said of Digg, a site conceived by television host Kevin Rose as a replacement for the editors who pick headlines for readers. On Digg, readers vote headlines up by "digging" them, or down by "burying" them.

For now, Digg is safe, insulated from the marketplace as a well-funded private company. But if Adelson no longer plans to sell the company, he will have to take it public. And when the day comes that investors can vote the company's shares up or down, unless he can engineer a dramatic improvement in its finances, he and Rose will know what it feels like to be buried.