Why Demand Media Won't Make a Profit Soon, IPO or Not

Last Updated Aug 20, 2010 10:36 PM EDT

Demand Media, which recently filed for an IPO, has often sung the praises of the quality of its content. I understand that the people who do work for the company feel that they do good work -- over recent years I've had the sense of hearing from more Demand fanboys than I even did when writing about Apple (AAPL) or Google (GOOG). And yet there's the nagging feeling, based on a few choice samples, that a broad quality claim may be premature.

So it was with amusement that I read a satirical Jeff Bercovici piece in DailyFinance called, The Dumbest How-To Content From Demand Media. It's amusing, particularly if you spend the better part of most days researching and writing. But in the light of criticism that the details of Demand's filing attracted, the piece raises a serious question. Can Demand provide the level of context that will make well-heeled advertisers comfortable and convince them to direct part of their marketing spend to the company that has yet to see any profit in the last four years?

Bercovici's post does find choice examples of posts that give gravitas to the word frivolous, such as being told explicitly how to find someone's age by using a calculator to subtract their birth year from the current year, or that if you buy ointment in bulk, it can be hard to carry around. Or, you know, how to belch.

Someone claiming to be a writer for Demand emailed me after one of my analyses on the company, saying that "most Demand Studios writers are novices earning only a few spare dollars each week," but that "a select few are laughing all the way to the bank right now." Of course, the bank trip comes after writing about 2,400 words in a six hour period, based on "a few quality sources that have what you need."

It could be that some portion of people writing for Demand manage to come up with well-written and useful articles. However, clearly a portion doesn't, no matter how much the company wants to tout its editing process and writers. Byrne Hobart makes some interesting points. One is that Demand may actually not want content that is too good:
They've set prices at a point that makes it uneconomic to write a lengthy, well-researched article; better to write something quick that covers the topic without ultimately answering the question. And that is the perfect way to create an article that is less compelling than the ads. Right now, I can see the Demand Media is offering $16.00 to write "How to Build an Acorn Skiff". I could write 500 words on the subject, but if someone read what I had to say, and saw ads for an "Acorn Skiff Kit," or "Acorn Skiff Instructions," they'd probably opt for the ad.
And the point is to make people click on the ads so Demand gets money. Another trickier point is that Demand claims to make a high rate of return -- upwards of 58 percent -- on its cost of writing and editing for a new article.

It makes each article sound highly profitable. And yet, given that articles often cost $7 to $10 (as much as $20 for a small group of writers) and that editing is about $3.50 per article, it takes an enormous number of articles to make serious money. As I've calculated, each article makes an average of $54 a year in revenue. Furthermore, as Hobart notes, to get a 23 percent increase in page views year over year (and the associated ad revenue), Demand had to increase content by 134 percent. And as Demand's own figures show, there's a bit difference between individual articles theoretically making money and the whole business actually making money.

Over all, Hobart thinks it's a potential money machine, but I strongly disagree. Demand has to shovel stuff out faster and faster to keep the machine running, and they are insatiably advertising for new writers. The company cannot keep up with its own demand for content with the people available. Given the rates most make, I'm not surprised. It hasn't been profitable yet, and given that it takes people to write the material, no matter what level of quality, there isn't a way of scaling the work as you can with a computer-driven process.

The option is to attract higher end advertising. Demand has been trying to woo high end marketers to sponsor sites or pay for custom content. It's had some early scores, but continued success will mean attracting the quality of audience attention that those spending hefty amounts want. And risible content like how to calculate someone's age isn't going to do it. Either Demand will have to move far upscale, and pay rates well beyond even the top $80 an article it seems to offer a select few to get that level of material, or its hope of profitability will continue to founder.

Related: Image: RGBStock.com user hisks, site standard license.
  • Erik Sherman On Twitter»

    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.

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