Demand Media: The $114 million content machine that has nothing to do with news

: Image via CrunchBase

I’ve been saying for a long while that Demand Media‘s digital content model has potential to make it big. And now it’s filing for an IPO, claiming the company has stock worth up to $125 million.

It’s clear that Demand’s growth is by far outstripping even its own predictions and the time is now to float the stock and end the start-up phase. paidContent and AllThingD have tonnes of coverage on this and are both worth following closely.

So how much money does this “content farm” make?

My former paidContent colleague Staci D. Kramer spells it out here and the SEC earnings filing is here. Some numbers:

$114 million (£71.4 million) in revenue for the first half of 2010 – on course to reach $216 million (£137.1 million) in 2010 FY.
Demand made $66.2 million ($41.4 million) in H1 from “content” – i.e. the stuff it commissions from its 10,000-strong army of freelancers
Deals with Google accounted for 26 percent of entire revenue during H1, up from 19 in H109. This really is food for thought for anyone suggests “no one makes any money from Google”. Demand makes millions upon millions from Google Adwords on its own sites and alongside its content on YouTube and elsewhere. Demand also has specific deals with the big G, such as a cost-per-click deal with eHow.

All that revenue doesn’t quite translate into profit however: as with all earnings releases these days, there are several versions of “profit” to choose from in Demand’s SEC filing, but on a GAAP basis (the financial reporting rules used as standard) it made a “net loss” of $22.25 million in the first half of 2010.

Working model

Demand launched in the UK in March (a Europe-wide launch is part of the plan eventually). As I wrote back in March 2009, Demand publishers 2,000 videos to YouTube a day (now closer to 4,000) and it uses complex algorithms to choose which posts its contributors should write, based on what kind of content advertisers are looking to buy space next to. On top of that, it runs various websites such as Livestrong.com, the site of the Lance Armstrong Foundation, it has contents deals with Gannett’s USA Today (alongside a growing number of regional US papers) and NFL.com.

But here’s what strikes me about Demand: it doesn’t do journalism. As SVP Steven Kydd has told me on a couple of occasions, the Demand model has never been about news. Its biggest site, eHow.com, hosts how-to videos, step-by-step articles and nothing else.

As the debate continues as to how the media industry might sustain news and original journalism, I increasingly wonder if legacy print-based publishers should somehow use all the revenue tools and models available as online publishers and simply make enough money to cross-subsidise their journalism. So it’s less about “making money from news”, as “making money from whatever works”. This is why Will Lewis and the Telegraph’s ill-fated Euston Project was such an exciting idea.

Thinking differently

There is money to be made in online content. But newspapers and magazines have to think about which content models make the most money.

But don’t just take my word for it: here’s the executive summary to a report from Nick Thomas, of Forrester, a very smart analyst on the newspaper biz. Apologies to him for quoting this at length (you can buy the report here):

While traditional media companies agonize about how to charge consumers for expensively produced content, other providers are approaching the challenge of the post-Media Meltdown content market differently. Demand Media’s disruptive model uses technology to ascertain what consumers want to read or watch. It then calculates the potential revenue each piece of content can generate before tapping into a network of writers and filmmakers to create large volumes of cheap and, theoretically, profitable content.

Other companies can learn from Demand Media’s model, which also relies on and exploits the changing concept of what online content is for. When content is commoditised, it needs to be cheap, useful, and targeted to an existing audience. Companies should explore how technology can bring new efficiencies to their content creation and distribution.

Demand Media By The Numbers (paidcontent.org)
Why USA Today Partnered with Demand Media (poynter.org)
UPDATE 2-Demand Media files for IPO of up to $125 mln (reuters.com)

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http://www.perfectmarket.com/ Lee Glandorf

Demad Media certainly demonstrates immense potential for profit. You correctly suggest that journalists and newspapers would do well to follow Demand’s example by utilizing “revenue tools and models” to “make money from news.”

Your point that Demand “has nothing to do with news” is arguable. The company is creating content for Gannet, as you noted, in addition to a few Hearst properties. Whether or not that content is “news” is for the publishers and its readers to decide.

Where it gets interesting, to me, is in your point about “cross-subsidizing” journalism. Or as we say across the pond: devising new revenue streams for news organizations.

A number of publishers, including the Tribune Company, Hearst, LA Times and SF Gate have already begun to implement tools and systems which allow them to apply a performance metrics to their high-quality *pre-existing* professional journalism. The metrics allow publishers to sort their hard-won professionally produced stories through a performance lens that provides traffic, actual revenue data, and projected revenue insights, and suggestions that will improve overall story performance. (See: http://perfectmarket.com/whatwedo/vault)

These companies and others are working with Perfect Market, a journalism startup in Southern California, which aims to helps publishers get the most out of their content in the search economy. By identifying what users want (as Nick Thomas of Forrester suggests is so important) and understanding their content’s performance potential, publishers have seen as much as a 20x increase in revenue.

The Demand model is merely one approach in a business development environment that is blossoming.
http://www.psmithjournalist.com Patrick Smith

@Lee, interesting comment. I guess the distinction that I’m making is that DM doesn’t do “journalism” as we might understand it, i.e. based on hard-hitting facts and current affairs.

For example, perhaps its biggest deal so far with Gannett is to provide travel tips to http://traveltips.usatoday.com/ – which is not exactly holding power to account and is about as far away from news as you can get.
http://www.prorecoveryinc.com/ Roger

Yeah, demand does a pretty good job. They have a lot of weight and their sites, such as ehow, always show up when you do a search.

I think the biggest hurdle traditional media has would be creating the same amount of volume that Demand Media can produce.

psmith, journalist