Muhammad Saleem is a social media consultant and a top-ranked community member on multiple social news sites. You can follow him on Twitter

By now you have probably read the countless articles about how flawed the contextual advertising system is on Digg. The system at Digg is certainly flawed, but not just in terms of contextual advertising. And one site - StumbleUpon - it seems, plans to capitalize on those flaws (and very well might be successful in doing so).

If you're a successful online publisher, service provider or Internet marketer then you're probably well aware of the advantages of using (not exploiting) social news sites. If your site or service falls in a niche that matches nicely with the vertical (and demographics) of a particular popular social news site then you stand to gain hundreds of thousands of visitors by creating content for the audience of that particular site. The problem, of course, is as people realize the importance (or viability) of social news sites as marketing platforms, many of these people try to exploit them with poor content and then pushing it via brute force promotion, buying votes, using multiple accounts, and other terms of service and use violations.

To prevent such people from 'gaming' the system by inflating votes, the social news sites increase the sophistication of their promotion algorithms by making the 'gaming detection' more robust and demanding a higher degree of diversity in votes on a story before it can be promoted and get the traffic (which at that point the algorithm deems deserved).

It seems, however, that this increased sophistication doesn't always work as planned and often penalizes certain users and sites more than it should, and in many cases overzealous moderators (on social news sites) end up banning users and sites for spamming activity or other terms of use violations. Because of this, these social news sites incur the ire of many users in the social news community, independent publishers, as well as marketers, and often rightfully so.

A different approach

Ultimately, these sites have established terms of use and service and they are well within their rights to make the decisions, however detrimental they may be to the community and the long-term profitability of the sites. On one end we have Digg, that has long raged a war against marketers and often the very people that helped build the community and is quite often criticized for it very vocally. At the same time, the site that was once a beacon of hope for the independent publishers, now seems resolutely aligned with the mainstream.

But on the other end, we have StumbleUpon which has decided on a markedly different approach to solving its problems. StumbleUpon bans users that are seen to artificially inflate votes on content because of the terms of use violation, but then offers a viable alternative to those who want to legitimately use the service to cash in.

A look at revenue

StumbleUpon's 2008 expected revenues are approximated at $5-7.5 million. At the same time, Businessweek estimates that in the first three quarters of 2008, Digg lost $4 million on $6.4 million in revenue. While I don't know the costs to run StumbleUpon, it's fair to assume that they are far less than running Digg, not only because StumbleUpon is substantially smaller in terms of users and monthly traffic, but also because the service doesn't require the same number of servers or have to deal with the bandwidth costs that destination sites like Digg do.

So how does StumbleUpon manage to make comparable revenues to Digg with far less traffic (as a destination) and a substantially lower number of users, while not alienating marketers and publishers? It's quite simple actually, and considering that it's no secret and nothing new, it's surprising that no other social news site has been able to do something similar. StumbleUpon uses a two tiered approach to making money while keeping the community, the marketers, and the publishers happy.

1. Sponsored Users - while a free, basic StumbleUpon account has everything that most users will ever need, the service allows you to upgrade to a sponsored account for a modest fee. 2. Sponsored Stumbles - to resolve issues with marketers and publishers, StumbleUpon allows them to buy traffic from the service. Before you start thinking that paid traffic pollutes the integrity of a trust-based social news site, consider their justification: the whole purpose of the site is to determine the preferences of a user based on his or her habits (thumbs up or down) on the site and then continue to send the user targeted sites. If the service performs its functions well, then it shouldn't matter if the content is sponsored or not, because in either case the content is relevant to your interests based on StumbleUpon's recommendation engine.

Rather than outright banning users for violating the terms of service, StumbleUpon sends them the following email while putting their accounts under review.

Our Terms of Service prohibits members from creating multiple accounts without permission or using a StumbleUpon membership to promote a specific site, business or product. If you'd like to advertise on StumbleUpon, please visit this page for more information: http://www.stumbleupon.com/ads

Why hasn't Digg been able to monetize?

Going back to the original point for a moment, the reason why Digg hasn't been able to monetize the site is partially because over half the users don't actually view the ads (on Digg or the sites they click out to) and the ones that are able to see ads aren't clicking on them because the ads just aren't relevant to them, but just as important, it's because they haven't been able to leverage the audience with the publishers the way StumbleUpon has managed to. In fact, Digg doesn't even seem to have a plan in place to do so. According to statement from Jay Adelson from last month, here's the monetization plan for Digg:

The company recently started to sell ads on its RSS feeds. It is on the verge of launching a revamped version of its homegrown search engine that the company hopes will produce more relevant and profitable search advertisements. And it is within a month of closing a deal with a mobile ad provider to sell more ads on cell phones.

The answer is pretty straightforward, Facebook figured it out with Beacon (though they butchered the implementation) and StumbleUpon figured it out a long time ago. Leverage the demographic goldmine you have to understand your target audience, then use your collaborative filtering and recommendation engines to nail down the exact preferences of your patrons, and finally give them what they want, but charge the people whose content you're delivering. Targeted traffic (and audience/community building) doesn't get better than that.

Also noteworthy, StumbleUpon, which has recently unveiled a new design, has upped its efforts to increase revenue, and in a surprising but very intelligent move, has started to market its paid traffic service to the Digg audience.

Keep in mind, eBay has done virtually nothing with StumbleUpon so far but has plenty of options to explore. Perhaps Om is right, maybe Digg should buy StumbleUpon (or the other way around considering the underdog is profitable).

Interested in Digg and StumbleUpon Resources?

- HOW TO: Get the Most Out of StumbleUpon

- Diggs Recent Bans and the Limits of Crowdsourcing

- Digg Toolbox: 50+ Digg Tools and Resources

Image courtesy of iStockphoto, SteveChristensen