Posted by: structureofnews | February 1, 2011

One Born Every Minute…

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.


Responses

  1. Reg,

    Personally, I wouldn’t presume to comment on the Demand Media IPO; the financial markets have their own reality distortion thing going, and trying to gauge future events in that universe is sort of like trying to predict the weather on a specific day a year from now.

    Still, from an evergreen content standpoint, there are of couple of interesting Demand Media issues worth considering:

    At this point, it’s evident that writers who do well at Demand tend to have a certain kind of talent which may not be shared by the journalism community at large. Consider this: a typical Demand article might be about, for example, the question “How do I train my dog?” And given that task, a Demand writer will crank out a generic, facile or otherwise, 500 words on dog training, then move on.

    A process, if you really think about it, not much different from working a sports desk and writing a series of baseball briefs where the source is strictly from scorer stats.

    I think the problem a lot of writers have with Demand, an understandable complaint, is that they tend to see “How do I train my dog?” as a fundamentally lame question in the sense that a better answer might be directed toward the counter-question of “What kind of dog do you have, and what do you want your dog to do?”

    Yet another interesting thing is the extent to which Demand’s flat-rate compensation model might not be the best in the longer term.

    Back in September 2009, Forbes magazine ran a piece (www.forbes.com/2009/09/29/local-news-network-business-media-senturia.html) on tech entrepreneur Neil Senturia’s attempt to launch what he termed the “Starbucks” of local news. An effort which has since sunk without a trace. During the course of an interview, Senturia mentioned that he had rejected a “goofball” writer payment model in which “reporters were paid with stipends plus an 80 percent cut of the ad revenue generated by the pages on which their stories appear.”

    What was curious was that Forbes never bothered to ask why Senturia thought the payment model was “goofball.” My sense is that there could be a useful flat-rate plus residual model as it applies to evergreen content. Things such as backgrounder stories from freelancers. Senturia’s problem may have been because the specific stipend plus 80 percent didn’t pencil out. Something of a workable model with an unworkable implementation.

    Regards,
    Perry

  2. Perry,

    You’re certainly right about that financial market parallel universe; I just wish I had some of that money it seems to generate with regularity….

    But on the broader point: Demand Media obviously creates some useful content, and I wouldn’t want to draw too firm a line between what’s journalism and what’s not. My bigger issue – and I think we agree broadly on this – is with the attempt to immediately monetize content through ad revenue.

    Shifting that to an immediate ad revenue plus residual ad revenue model makes much more sense – albeit with some logistical issues of tracking, etc – and isn’t all that different from the system of royalties that music producers get.

    But that said, I still don’t think ad dollars – given infinite inventory, etc and all the other issues with ad rates online – will really pay for more than a fraction of content creation online. Unless we can really depress content costs without hurting content creators – hence my hopes for structuring information.

    Reg


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Categories

%d bloggers like this: