Demand Media’s successful IPO last week didn’t quite dispel the air of controversy surrounding the company. Demand has never been profitable, it and its content farm brethren are blamed for diluting search results and its content is damned as lightweight fluff written for near-slave wages.
But the controversy is overstated. Though Demand’s business model appears a little shaky, companies in online media should monitor it closely for lessons in content creation efficiency and targeting, and for potential partnership opportunities.
How It Works
Demand produces low-cost content to order based on its analysis of search trends, advertising rates, competitive content and its long-term value in terms of ad sales over time. It suggests topics based on that algorithmic analysis to a network of 13,000 freelancers. Those freelancers then write articles or make videos that Demand shows on its own highly search-optimized sites — eHow, Answerbag, Livestrong.com and Trails.com — or syndicates to partners like the San Francisco Chronicle and the NFL. It pays its freelancers $15 for short articles.
But this cheap, clinical approach to content creation inevitably offends journalists, and produces a lot of how-to articles of varying quality.
Limits to the Model
Demand Media content is at least mildly useful to the masses. Otherwise, it wouldn’t generate CPC revenues or enough clicks and links to influence Google results. That content is not hugely valuable, but it’s not as worthless as this this story, which compares Demand’s revenue per user to that of Google, implies — Google, after all, is one of the most profitable media companies in history. In contrast, Demand’s dollars per thousand page views on its own sites is showing modest growth, indicating the company is starting to move beyond low-CPM text ads into higher-value advertising.
In the most recent nine month period, Demand depended on Google for 28 percent of it revenues. It uses Google’s ad networks and has a revenue-sharing agreement for video content shown on YouTube. Two-thirds of the page views for its biggest site, eHow, come from Google, and search drives 40 percent of the views across its network.
But that dependence is one way. Google takes about a 15 percent cut of the ad revenues its network generates for partners (compare Traffic Acquisition Costs versus network revenues). So the $50 million Demand got from Google over nine months produced peanuts for the search giant. Any conflict of interest implied by Google making money from content farms just isn’t worth it, compared with the potential damage to Google’s reputation. Nonetheless, Google recently responded to chargers that content farms and spam were affecting search results quality. And Demand’s attitude that Google’s response had nothing to do with it isn’t entirely convincing. Demand’s Google dependency is a little scary.
How It Could Evolve
Yahoo acquired Associated Content, a content farm similar to Demand, and AOL has a rival freelance network called Seed, run by ex -New York Timesman, Saul Hansell. AOL’s Patch hyperlocal content network isn’t completely different from a content farm — and has search engine watchers equally concerned. Content farms are an evolution of the Times’ About.com property, and the Times considering investing in Demand. So clearly, Demand’s content farm model is attracting attention. Here’s how Demand might evolve it further:
- Verticals. Some Demand properties align celebrity brands with topics (Lance Armstrong-health, Tyra Banks-beauty), but the company hasn’t invested much in higher-quality content for those sites, or in other verticals like technology, food, or older audiences that could command premium advertising.
- Sponsored Content. With just a little polishing, Demand could apply its model to advertorial-like sponsored content and combine that with the social media tools it acquired via Pluck for advertisers.
- Q&A and Content. Blending community-answered questions a la Quora with a content farm seems a natural fit – Mahalo may be steering this direction with video already.
Related Research: Google Needs to Fix its Spam Problem, Even if it Hurts