Why so much fuss about Demand Media's IPO?
The company's being blamed for killing journalism and giving Google a nice fat Achilles heel--negative buzz that is overshadowing its initial public offering tomorrow.
Caroline McCarthy
January 24, 2011 2:47 PM PST
When Demand Media holds its initial public offering tomorrow, it'll be the first venture-backed IPO of 2011 and, though relatively small by Wall Street's standards, the most talked-about technology IPO in quite some time. That'll happen in this peculiar era of tech-industry financials, when the the big trend has been to prolong an IPO in favor of less restrictive private-market trading activity.
But that's not what everyone's talking about with Demand--nor is the $179.4 million in revenue it reported in the first nine months of 2010 (an operating loss of $6.4 million), nor the $1.2 billion valuation it's expected to reach when 7.5 million shares are issued on Tuesday. The IPO of the Santa Monica., Calif.-based company, founded in 2006 and run by former MySpace executive Richard Rosenblatt, is making headlines because Demand itself is so controversial. And many people will regard its short-term financial performance as evidence not just of the company's future, but as indicative of the fate of the media and even search industries as well.
Purely by the numbers, there are financial questions about its viability. Demand, for those who are unfamiliar, is a company that uses algorithms, top-notch search engine optimization, and an army of freelancers to produce an immense amount of written and video content in a remarkably short amount of time. Before it opened up its books in advance of its IPO, the company used to tout its financial stability. But it's not yet proven profitable, since the way that it amortizes some costs--distributing them over five years rather than reporting them upfront--means that it's not making as much money as it appears to be.
But perhaps more crucial to its future as a public company, Demand's revenues are extremely dependent on referrals from search engines, meaning that it's at the mercy of Google's own product decisions. That's because its content, many allege, is designed to rank high on Google rather than to provide a quality experience for readers, viewers, and other users. When Google hinted last Friday that it's going to find some algorithmic way to de-prioritize content that falls under that umbrella, the elephant in the room was unequivocally Demand.
And what this leads to is the real fuss over Demand's IPO, which is philosophical rather than financial. Critics of the company say it's polluting the Web with cheap content that outranks higher-quality content in search queries, driving down the salaries of freelance writers and video producers in the process, and search engine aficionados say that it's making search queries less useful because so many Demand-related results are pushing others off the top Google search rankings. The derogatory term for Demand and similar companies is a "content farm" or "content mill," bestowing a mood of automation upon creative processes that, by all accounts, should be far from automated.
Demand Media is actually a little bit more complicated than that. If the Internet is a series of tubes, as one politician so famously claimed, Demand is arguably the company that's best figured out how those tubes work, and how to get its own material (of which it can generate a lot) pushed through them. Detractors are complaining that it's trying to crowd out the rest of the Web and that its content is clogging those tubes like icy slush in a storm drain.
Here's an appropriately snowy example: A couple of weekends ago, I was in northern Vermont and looking to find a good snowshoeing trail. After someone recommended a peak called Mount Hunger, I googled "hiking mount hunger vermont" for more information. Two of the top three results came from Trails.com, a site that became part of Demand Media when it acquired a company called Hillclimb Media early on. The eighth result came from MountainZone, another Demand Media site geared toward skiers and snowboarders.
On the Trails.com page for the main trail up Mount Hunger, I was met with a three-sentence description of the trail, a Google topographic map, a WeatherBug widget for the region, links to related Trails.com pages, and suggested hotels through Trails.com's own booking service. For actual trail maps, I'd have to subscribe to a "pro" account. Oh, and there were ads: display units for the trendy W hotel chain, affiliate links, and Google text ads that took up almost as much space as the site's content itself.
Was Trails.com's high presence "polluting" my query for snowshoeing tips? Well, it wasn't inaccurate, nor was it thoroughly unhelpful. But ranking lower than the Demand-owned site on my query was a whole lot of rather inarguably better content: full Google Book about hiking trails in the region, a photo- and detail-heavy entry on mountaineering wiki SummitPost, and resources from the local Green Mountain Club, which maintains many Vermont hiking trails. Other search queries, likewise, see hastily written eHow cooking tips ranking above complex food magazines' recipes or responses to Answerbag popping up in information-seeking searches, and information-scant Demand slideshows that have been syndicated to media partners.
And so there's the heart of the controversy. Like a fast-food chain encroaching upon a small town or a big-box retailer in a land of independent businesses, Demand is stirring up harsh feelings among those who value high quality (Demand itself, of course, says that its content is high-quality) and long-form content. A successful IPO and steadily growing stock price over the next few months would seem to validate this, and would be taken by many pundits as yet another sign of the much-publicized death of journalism.
Last I checked, McDonald's and Wal-Mart weren't going away any time soon. In any market where there are "premium" products, there are bound to be cheap ones too. But when you're in an unfamiliar town, walking around looking for somewhere to get a salad, the greasy burger joint doesn't instantly pop up on every corner regardless of which way you turn the way a content farm's pages tend to top ever more Google searches. And that's where the real concern about Demand's financial viability is: that as it grows, and its properties fill more and more Google search results with quickly published or easily replicable content, that search engines will devise a way to lower its rankings and suck it out of "the tubes."
And Google may be doing just that, indicating that it will find a way to deal with content that isn't spam per se, but which was designed with search engine ranking in mind rather than the quality of information. It's particularly pressing for Google at a time when the rise of Facebook has dealt a blow to its Web-wide hegemony, and when critics have said that less relevant Google search results may open up new possibilities for search start-ups to finally one-up Mountain View. If it's a pressing issue for Google it would, indeed, raise real questions about Demand's viability. Look at Facebook's ability to clamp down on third-party applications' ability to post on members' "walls" when the complaints started rolling in about too much "app spam."
Prospective investors should know that, given the fast-changing nature of the Web, Google could have a far bigger impact on Demand Media than lawmakers looking to curb obesity would have on McDonald's. But Demand proved its capability to innovate and game the system when it built its SEO-munching content engine in the first place, so it very well may have a few tricks up its sleeve in dealing with the content-quality police.
Sketchy? Maybe. On shaky ground? Definitely. But Demand's proven smart so far. At the least, with its financials open to scrutiny and its business model potentially in need of a Google-proof revision, this will be an interesting one to watch.
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