Posted by: structureofnews | September 14, 2010

The Demand for Demand Media

OK, I take it back.

Just circling back to an earlier post that mentioned Demand Media and its model of predicting what people are searching for and creating content (at low cost) to meet those needs.  The post wasn’t so much about Demand Media per se, but more about what kind of universe we would inhabit if we could predict what kind of profits any single piece of content would generate.

Still, I mentioned then that

First, a side comment: At $15 a pop for content, frankly, Demand Media would be profitable regardless of what algorithm they use. Low content cost is probably a big part of their business model, never mind predictability of ad revenue. But of course being able to predict user demand means they waste less on content generation and drive margins up.

Well, maybe not.

According to Wired, it’s not entirely clear from Demand Media’s prospectus whether that business is actually profitable or not.  If some of that skepticism is right (and I confess I’ve only skimmed the filing), then it says a lot about the sustainability of business models based on ad revenue, if you can’t break even when paying just $15 for each piece of content.  (To be fair, Wired doesn’t say that – but I’m also guessing that if the content part of the business was going gangbusters, Demand Media would have highlighted that in the filing.)

Of course, search ads aren’t the only way to make money online, but this does show some of the challenges ahead in trying to build traffic-based businesses, even with very low-cost content.  If ad dollars per “unit of information,” to coin a phrase, are always going to be limited, you either have to find new revenue streams – premium subscriptions, services, sales of data and lists, etc – or reduce your per-unit cost of information.

People are certainly exploring the new revenue streams, but on the other side of the equation, a fair amount of the energy has been spent simply trying to reduce costs – rather than reduce the cost of per-unit creation.  So we’re talking about smaller newsrooms (and to be fair, there is waste and inefficiency in many), paying people less, turning to more (free) user-generated content, and so on.

Those aren’t bad initiatives, but with exceptions like Topics Pages, we’re still fixated on generating revenue against each piece of information in a very small period of time – generally that day or that week.  We really need to look at how to extend the lifespan of information, so that we can – if we’re going to rely at least in part on ad dollars – continue to collect revenue against those stories (or whatever) for a much longer period.

(To be fair, that is what Demand Media says it does too; it aims to produce content that will continue to be searched for again and again.  So maybe even this will only take us so far.)

But that’s just the first step, in any case.  By moving on and restructuring the way we create, present and store information, we should also be building robust databases of information that we can make money from – not just in terms of ad revenues when people are looking for old stories, but perhaps by selling the data, or allowing people access to the data,  and so on.

And we should probably have a different metric, too: Not so much ad revenue that each “story” got, but more the expected lifetime value of ad revenue that a “piece of information” might contribute to.  If we’re building a phone book, one entry at a time, the ad revenue that each entry gains is nearly zero; but the expected lifetime value of that entry is at least some non-zero proportion of the value of the entire phone book.

Hard to calculate, I know – but if we want to have metrics, we’ll need something like this.

And hopefully it’s more than $15 a pop.


Responses

  1. Reg: you raise some great points about revenue generation and the lifespan of an article. When I recently spoke with the CEO of Associated Content (recently purchased by Yahoo!) they see their content as an annuity for both them and their writers. If it’s good evergreen content–or at least the type of evergreen content people are often looking for–it will continue to pay “dividends.”

    Also, from what I’ve discovered, newspapers don’t often think of their content as annuities, and don’t take advantage of services out there that will help them obtain revenue from reprints and the like. IMO, it’s a strange myopia that has to change if newspapers are going to survive.

    • Tish, I think it’s hard for any legacy organization to rethink its model or culture; and newspapers have for so long been dependent on that day’s income from advertising. To be fair, they still are, to a great extent – and so it’s hard to try to maintain that will building a new model. But as you say, we must.
      What I’m hoping is that structured journalism – or some variants around it – can provide a path from one side of the divide to the other, without the need for huge leaps of faith. (Some, perhaps, but not huge ones).

  2. […] the newsroom files (unless we’re Demand Media, who pay by the piece, but that’s another post.  Or two.)  So you can imagine what a newsroom does is file a series of these stories, some with […]

  3. […] billion – north of that of the New York Times?  What are investors smoking? As we’ve noted before, this is a company, that while it’s got an interesting business model based on (very) […]


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