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Google to Demand Media: You're in Our Crosshairs

Google (GOOG) regularly changes its search engine algorithms. But it announced a shift today that should have Demand Media fearing for its pending IPO. Google sounds as though it will take aim at content mills, and that's bad news for Demand.

Recently, there has been some evidence that not only was Microsoft (MSFT) Bing slowly improving its search market share, but even satisfying users more than Google. One of the big criticisms is that content mills pollute the results. In some cases, spammers scraped content off other sites and yet ranked higher in Google than the creators did.

But in many others, search results are filled with pages from companies like Demand and Associated Content (YHOO). Not only do these companies create hundreds of thousands of articles a month, but by carefully analyzing and using Google search results, and relying on the attention volume of content gives them, they push more useful content down in the search rankings.

Google says its own metrics show that its "search quality is better than it has ever been in terms of relevance, freshness and comprehensiveness." But your internal metrics don't matter when consumers, who have their own measurements of what satisfies or leaves them wanting, complain enough.

And so Google now plans to take on the content mills, as principal engineer Matt Cutts noted on the official Google blog:

As "pure webspam" has decreased over time, attention has shifted instead to "content farms," which are sites with shallow or low-quality content. In 2010, we launched two major algorithmic changes focused on low-quality sites. Nonetheless, we hear the feedback from the web loud and clear: people are asking for even stronger action on content farms and sites that consist primarily of spammy or low-quality content. We take pride in Google search and strive to make each and every search perfect. The fact is that we're not perfect, and combined with users' skyrocketing expectations of Google, these imperfections get magnified in perception. However, we can and should do better.
This is where Demand gets really nervous. According to the company's most recent amended S-1, it's disturbingly dependent on Google search results and advertising to make money:
For the year ended December 31, 2009 and the six months ended June 30, 2010, we derived approximately 18% and 26%, respectively, of our total revenue from our various advertising arrangements with Google. We use Google for cost-per-click advertising and search results on our owned and operated websites and on our network of customer websites, and receive a portion of the revenue generated by advertisements provided by Google on those websites. Our Google cost-per-click agreement for our developed websites, such as eHow, expires in the second quarter of 2012 and our Google cost-per-click agreement for our undeveloped websites expires in the first quarter of 2011. In addition, we also engage Google's DoubleClick ad-serving platform to deliver advertisements to our developed websites and have another revenue-sharing agreement with respect to revenue generated by our content posted on Google's, both of which are currently on year to year terms that expire in the fourth quarter of 2010.
There has been some degree of mutual dependence, as Google does get revenue from Demand's activities. Furthermore, Demand has exclusivity provisions, so it can't necessarily replace its partner. And there is nothing that prevents Google from changing its algorithms -- hint, hint -- and undermining a huge part of Demand's revenue stream.

The financial benefit to Google is big, but still negligible. Demand's revenue for the first six months of 2010 was just over $114 million. Google walked away from China, calling $500 million insignificant, which it was to the company.

Interestingly enough, Cutts made a point of reiterating the fact that running Google Ads doesn't afford Web sites special treatment:

  • Google absolutely takes action on sites that violate our quality guidelines regardless of whether they have ads powered by Google;
  • Displaying Google ads does not help a site's rankings in Google; and
  • Buying Google ads does not increase a site's rankings in Google's search results.
Demand already delayed its IPO over accounting questions, because it treated payments to its writers as capital expenses that it would amortize over a five year period. It's an approach pretty much unheard of in the media industry, because a five year lifespan for a story is ludicrous.

If Google does decide to take action to keep users happy, which it might well have to do, then Demand faces a much bigger problem, as a significant amount of its business simply disappears. So might its IPO.


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