Last week at EconSM, much of the discussion centered around the problems of a business model dependent on someone else’s business—say the reliance of Photobucket on access to MySpace. I don’t think we spent as much time as we could have on what may be the greatest risk with social media: the users. At its base, no social media business can succeed or survive without user loyalty; those with scale can afford some slippage but nothing wholesale.

Facebook heard that loud and clear last fall. This week, Digg faced it head on as the site learned just what could happen when its users revolt against policy. For the full blow by blow, see Techmeme. The abbreviated version: After Digg was warned by AACS LA that publishing a Linux hack for HD-DVD encryption could infringe intellectual property rights, the site started pulling the stories as covered by its terms of service. Digg CEO Jay Adelson’s explanation—“we all need to work together to protect Digg from exposure to lawsuits that could very quickly shut us down”—only fanned the flames. The result: a massive user revolt and the decision by Digg founder’s Kevin Rose to bow to what some are calling “mob rule” by agreeing to post the stories no matter the consequences. From his declaration of dependence: “But now, after seeing hundreds of stories and reading thousands of comments, you’ve made it clear. You’d rather see Digg go down fighting than bow down to a bigger company. We hear you, and effective immediately we won’t delete stories or comments containing the code and will deal with whatever the consequences might be. If we lose, then what the hell, at least we died trying.”

In other words, community first—even when it breaks your own rules, business second. This time. No clue as to what Digg will do the next time it’s faced with a take-down request on another topic but it’s clear who actually holds the power in this equation. What that means for business—not so clear.