Alright, so maybe the headline is a little unfair.
But what to make of Demand Media’s IPO and its market cap – now about $1.7 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) low-cost content tailored to search queries, still doesn’t make any money.
As the Atlantic notes,
“We have had a net loss in every year since inception,” the company wrote in its IPO prospectus, as Wired‘s Sam Gustin pointed out. “As of September 30, 2010, we had an accumulated deficit of approximately $53 million and we may incur net operating losses in the future.”
So the company has an incentive to IPO – basically handing its losses to the investing public. But what are the public thinking?
The FT has some thoughts, and they’re not bad ones:
SEO. Like it or not, search engine optimisation is a reality for any company trying to find an audience on the Web. Older media organisations are still trying to learn the techniques, but Demand has them embedded in its processes from the start (of course, that implies a constant battle with Google – but that’s just a reality of the SEO game).
Low-cost production. Paying freelancers a piece-rate is an attractive way to acquire content, particularly when the price of each article or video is tied closely to the money that can be made from it. The big challenge is quality control.
Content Library. Much of the content is created to have a shelf life (though it’s debatable whether this justifies the five years over which the company amortises its costs of content production – another of the risks of trying out an unproven model like this).
That’s not to say I like much of what Demand Media produces, or even that this valuation makes any sense. But there are some good points here.
The first is that they have completely unpicked the normal news production model, turning it on its head and, as the FT notes, embedding search into the process. I’m not a fan of the particular way they do it – and as they’ve learned, it doesn’t even pay the bills – but there is a lesson here in rethinking the very basics of we do in a digital age.
I don’t think that paying freelancers nearly nothing is particularly novel, so I’ll pass on that point. But the idea that media organizations should think about the shelf-life of their content is one close to my heart. Again, I’m not a fan of how Demand Media does it, but it’s good to be thinking outside the box that us journalists have created for ourselves.
So there are lessons to be drawn out of this IPO. But probably not profits.