You'd think that old-hand Internet-types would be happy to see that Demand Media's IPO went swimmingly yesterday, with shares closing at 33 percent above their opening price of $17. But no. If we are truly living in a world where, as Peter Kafka said at Media Memo, Demand Media is worth about as much as The New York Times Company, then it's not a very rational world -- just like it was during the Internet bubble.
So why are investors so hot for Demand? Because in some ways, it exemplifies everything online media should be; it bases what content gets produced on what algorithms tell it to produce. This conte
nt is then produced in such a way that said algorithms (mostly Google's) will find it. If it sounds like this content is manufactured by robots rather than humans, you'd be almost right. One of the "sweet" spots of Demand (and other so-called content farms) is that most of the content is produced on the really cheap, as in at about a penny a word. Advertising, which makes up roughly half of Demand's revenue, mostly takes advantage of the long tail, though Demand also operates some major sites such as Lance Armstrong's LiveStrong.com. Demand also registers Internet domains, offering registrants some of the sausage stories its freelancers churn out and the chance to be part of its long-tail network.
Yep, it's an efficient model alright, that, among other things, produces some of the stupidest content the world has ever known. In his hilarious post, "The Dumbest How-To Content From Demand Media," Daily Finance's Jeff Bercovici finds out how to do all sorts of things that everyone excepting the common house-fly should know how to do, such as, "How to Put on a Speedo," and "How to Buy Canadian Molson." The latter offers the time-tested advice,"Bars and restaurants usually have a selection of beers, both on tap and in bottles. These places may have Molson Canadian for sale, but it is always a good idea to call to make sure."
Yes, you get what you pay for. According to
its S1, all of this resulted in 2009 revenue of $198 million, and $114 million for the first six months of last year, though it also had net losses of $22 million and $6 million, during those two periods. It must be overpaying the freelancers! Though the two companies are different in many ways, The New York Times Co. had $1.17 billion revenues for the first six months of 2010.
But seriously, while Demand has more upside potential than the Times right now, it's hard to see how its model works over the long-term. While a popular site such as its eHow (proud publisher not only of "How to Put on a Speedo" but "
How to Wear a Speedo") is so far capable of attracting advertisers such as
Procter & Gamble, the problem with the long tail is that it just keeps getting longer, and no matter how well you can target advertising, it's eventually going to exert downward pressure on ad rates. Not to mention, other companies such as
Yahoo's Associated Content and
Aol's Seed, are also, well, chasing the tail with content farms. (There are also concerns about Demand's accounting and a recent drop in traffic.)
For now, the Demands of the world are focusing on the continued shift of ad dollars to online media, and refined targeting, as the engines of their growth. The S1 says: "Finding better ways to reach this fragmented consumer base remains a priority for advertisers, a trend that is likely to accelerate as online advertising growth outpaces that of offline advertising growth, and as advertising dollars follow audiences from offline to online media." While that is true, it's not happening in the numbers needed to support the endless growth of the long tail. According to Kantar Media, online advertising was up by 5.3 percent in the first nine months of 2010, but TV, off of a bigger base, was up by ten percent.
Needless to say, it will take a lot more than current gains in online advertising for the long tail to be sustainable. But, just as it was in 1999, investors either don't understand, or don't want to understand this.
For now, it's good enough to party like its 1999.
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