Demand Media: A Story in 5 Numbers

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After almost a year of hype and speculation Demand Media finally had to release some numbers in order to file for their IPO.

Demand Media
Demand Media

In case you didn’t have time to read all 269 pages, here are the 5 numbers you need to know:

[Reminder: I work at Answers.com, which is in some ways a competitor]

$73 million

Most stories about Demand Media claimed that their “content farm” business was “profitable as hell.” The number most frequently thrown around was $200 million a year.

Demand Media’s total 2009 revenue was indeed right around there. But most of that was from other businesses.

Demand’s “content farm” business only brought in only 37% of that, $73 million.

$-22 million

Demand lost $22 million last year. The number would be higher if they were expensing their content creation costs instead of amortizing those costs over 5 years. If that’s profitable as hell, then Satan is drowning in red ink.

$-52 million

Since being formed in 2006, Demand has lost $52 million.

$4,672,330

Their 2009 compensation table shows Richard Rosenblatt earning $260,000 in salary, $100,000 in an incentive plan, and $4.3 million in option awards. Nice.

Demand Media 2009 Compensation Table
Demand Media 2009 compensation table

60%

Percent of eHow’s page views that come from Google search. The percentage would likely be significantly higher if they reported what percent of their visits and revenue come from Google search. And this doesn’t include the other search engines. It also probably doesn’t include traffic that goes from Google to other Demand properties and from there to eHow. So the percent of eHow’s revenue-generating traffic coming from search engines is probably much higher than 60%.

It’s normal for reference sites to get most of their traffic from Google. When About.com was bought by the New York Times for $400 million they were getting 80% of their traffic from SEO. Stack Overflow’s Joel Spolsky mentioned that his site got 85% of their traffic from Google, and they considered Google’s results page to be Stack’s home page. Didn’t stop Stack Overflow from getting an all star cast of investors. Search engine expert Danny Sullivan wrote an article 2 years ago pointing out that Wikipedia got 60% of its traffic from Google, and another 20% from Yahoo! And of course Answers.com (where I work) gets most of its traffic from search.

Reference sites are far more dependent on Google than most other sites, because most people go to Google when they’re searching for information. Even Wikipedia has been unable to build a strong enough loyal user base to be consider Google just a side source of traffic.

And here are 2 bonus numbers:

17%

Revenue from their owned Web Sites increased by 77% between 2008 and 2009, but by only 17% between 2009 and 2010. So the image of this as a business experiencing rapid growth may be exaggerated.

58%

The internal rate of return on content created during the 3rd quarter of 2008 is 58% (through June 30, 2010). So during the first nearly two years of that content’s lifetime it earned back it’s initial cost plus 58%. They caution investors to “not rely on the internal rate of return for a cohort, including our Q308 cohort, as being indicative of the internal rate of return for any other cohorts.” They justify the use of that quarter because it “represents the oldest cohort that utilized the core elements of our current content creation process.” It’s a good number. But it’s a small and perhaps unrepresentative sample.

By an interesting coincidence, in the first half of 2010 Google ad networks provided 58% of their advertising revenue, up from 44% in 2009. That’s a 30% increase, and does not bode well for their ability to sell directly to branded advertisers. The growing part of their business, eHow, probably has a substantially higher percentage of its revenues coming from the Google ad network, which is normal for this type of site.

Bottom line

Demand finally gave us 269 pages, some good numbers, and some nice analysis. But very little evidence that this model is working.

And if you’re really interested:

More key info from Demand Media’s S1

  1. GAAP losses: $22m for 2009, $6m for 1st half of 2010
  2. They’re pushing Adjusted OIBDA (adjusted operating income before depreciation and amortization expense), where they had $37m in profits in 2009 and $26m in 1st half of 2010. I can’t tell how much of this is legitimate view of the company going forward. They seem to have placed a lot of failed bets over the years that they’re probably amortizing, and that are “unfairly” weighing down their GAAP numbers (in that they may not be reflective of their current business). But they also amortize many of their normal operating expenses (for example, content creation) and I’m not sure if that’s included in Adjusted OIBDA.
  3. 2009 revenue:
    1. Total: $198m
    2. From web sites (not the registrar): $107m
    3. From web sites they own: $73m
      1. i. Growth from 2007->2008: 77%
      2. ii. Growth from 2008->2009: 17%
    4. [Registrar revenue also stopped growing. 61% in 2008. 6% in 2009. Their network of customer sites grew 57% or 58% each year]
    5. eHow:Responsible for 13% of their revenue in 2009, which should mean $26m
      1. Grew to 21% of their revenue in 2010 ($24m in 6 months)
      2. Has higher RPMs than the rest of the network
      3. And yet they claim they’re trying to diversify from it. While all of the content they produced in Q3-08 went to eHow, only 60% of the content they produced last quarter went to eHow.
  4. Google advertising: 18% of their 2009 revenue came from Google  ($36m) (This means about 34% of their non-registrar revenue). For the first half of 2010, it’s 26% of their total revenue. This also includes DoubleClick (I’m guessing a very small part) and YouTube (also I’m guessing a very small part). Their eHow AdSense deal is good till Q2 2012.
  5. Capitalization:
    1. Content is amortized on a straight-line basis over five years
    2. Internally developed software and website development costs are depreciated on a straight-line basis over their estimated three year useful life.
  6. eHow and eNom (their domain registrar): in addition to being about half their revenue, they mention that eNom is “a valuable source of data regarding Internet users’ online interests, expanded third-party distribution opportunities and proprietary access to commercially valuable domain names that we selectively add to our owned and operated websites. Together, our Content & Media and Registrar service offerings provide us with proprietary data to identify Internet users’ online interests, the ability to produce relevant content in an economically sustainable manner, broad distribution that enables our content to reach the audience that will want to consume it, a system of monetization tools that enable us to generate revenue and the scale to realize efficiencies within our overall business.” Later, when they describe how they started the company, they write “We commenced operations in May 2006 with the acquisitions of eHow, a leading ‘‘how-to’’ content-oriented website and eNom, a provider of Internet domain name registration services.”
  7. Article content published on eHow in Q3-08 generated a 58% internal rate of return through June 30, 2010. This content achieved 62% revenue growth in the second quarter of 2010 as compared to the second quarter of 2009 … It’s quite possible though that they didn’t choose Q3-08 randomly, but rather they chose it because that’s the quarter that produced the best numbers. Similarly, it’s possible that the content did not achieve 62% revenue growth Q4 to Q4, or Q1 to Q1. These are good numbers. But the numbers may be cherry-picked, and may not be representative.
  8. Video: “we believe currently that the internal rate of return on video is less than the internal rate of return on article content”

For more coverage of Demand Media’s recently released numbers, see:

And here’s some good background on Demand Media:

For more background and perspective on “Content Farms” see Quality is Still King and Large-Scale Content-Creation Sites.