Last Updated Aug 9, 2010 3:33 PM EDT
Demand boasts of "proprietary algorithms" that help it pinpoint what consumers want to read, as well as a "10,000+ member professional freelancer community" that "generated a daily average of over 5,700 text articles and videos during the quarter ended June 30, 2010."
However, that's only part of the company. Demand makes money from both online ads for content as well as Internet domain registrar services (it owns eNom). The percentage of revenue that advertising on content represents has grown, though a significant portion is still from registrar services. Here's a six-quarter look at the split.
Demand Media Revenue Split
In addition, here's a graph showing how more revenue has started to come from the content side:
Mind you, there does seem to be some obfuscation in the numbers. As is true with other domain registrars, eNom will often run ads on domains with no content, as Danny Sullivan at SearchEngineLand.com notes. My question is whether the ad dollars come under domain services or content. In the first case, Demand is even more dependent on ads than its S-1 form would indicate. In the latter, then its commissioned content isn't as productive as the company would like to portray. In either case, you have to wonder about the transparency of the numbers and why Demand felt that it had to stress non-GAAP financials to try and make itself look profitable when it clearly isn't.
I should point out that I've been a critic of Demand as a client for freelancers. To make money at a rate of generally $7 to $10 for an article of several hundred words, people have to grind out copy faster than Jimmy Dean creates sausage. Videos bring only $100 for all the shooting, editing, and costs.
Although some professionals who are down on their business luck have done work for Demand, there is also a fair amount of verbal fertilizer that covers the lawns of its sites like eHow.com. The company can call what it places on the Web "relevant, high quality content" as much as it wants, but in an objective sense, that is often untrue.
According to Demands own numbers, its average freelancer produces about half a piece of content per day. Combine that with the rates and it tells you that, on the whole, either most of the freelancers see it as a dalliance, because that would be very little money, or that a huge portion of them don't produce content on a regular basis.
Given the incessant stream of ads that Demand places for new content creators, my best is on the latter. The 10,000+ number is probably the number of people who have registered at one time or another, not active producers.
That's a big weakness that faces Demand. Last year, the company had content revenue of $107.7 million. Spread over 2 million pieces of content, it means that each content piece brings in an average of $54 per year. Given that content will drop off in popularity, Demand needs a river of new articles and video to keep the money flowing.
Another weakness is the company's lack of profitability. In 2008, it had a net loss of $14.2 million on revenue of $170 million. Last year, the loss was $22 million on $198 million in revenue. In the first six months of 2010, revenue was $114 million with a net loss of $6 million. Certainly an improvement: compared to the same period in 2009, revenue was up 24.9 percent, but operating expenses rose by only 15.2 percent.
However, this isn't an Amazon.com, which could leverage a single infrastructure to efficiently handle sales of an increasingly broad variety of products. If Demand wants to be a content company, it must be able to scale creation fast enough to grow revenue beyond cost. That gets back to the first issue of constantly recruiting enough people to keep the content flow moving.
Another strategic issue is the company's dependence on Google. In the first six months of this year, 26 percent of its revenue came from "various advertising arrangements with Google." By the way, that's total revenue, not content revenue. In other words, out of $114 million, just under $30 million was from Google ads. Given that $51.3 million was from content-related advertising, Google is the source of 58.4 percent of the money it makes from content, and Demand positions itself as a content company.
Demand's eHow site brought in 21 percent of the company's revenue, with 60 percent of the traffic was from Google. It is disturbing to be so beholding on one customer. Demand is at the mercy of Google in any negotiation, as well as hyper sensitive to search engine changes that could disrupt the flow of traffic. It can't afford to walk away.
However, Google can. According to an interview Sullivan did with Matt Cutts, the head of Google's web spam team, the search giant has begun to look at whether content farms come close to being spam. I wouldn't necessarily read too much into this. After all, Demand is a major producer of video that appears on YouTube. However, it can't take its revenue for granted, which is probably why it has begun to expand into providing content to newspapers. Not exactly the robust market you might want as a fallback. And given that Google has filed for patents in automated content and Yahoo (YHOO) bought Demand competitor Associated Content, there are some big reasons to find other significant markets, and quickly.
- Content Mill Demand Media Expands Its Reach -- To More Newspapers
- Google and Demand Media Racing to Patent Automated Content
- Yahoo Buys a Content Mill, So It Can Make Money off Google