Let's say you're an investor in media companies. Would you rather own Demand Media, the red-hot media start-up that pays below-market wages and makes money by creating content that is expertly matched to what the people want. The company just filed to go public, and aims to raise $125 million.
If you follow the press coverage, you'd surely have to pick Demand Media, right? I mean, according to a lengthy Wired magazine article, the company's business model is "Profitable as Hell" (the headline). And, according to the analyst Lou Kerner, Demand is poised to become the first billion dollar IPO since Google. Kerner was less sure of Demand's profitabilty than Wired was, but cited "rumored" profitability.
Oops! Turns out Demand Media is not profitable, according to the company's IPO filing. Demand lost $22 million last year on $114 million in revenue. Which is, wait for it, actually quite a bit worse than Newsweek did in 2009. The magazine lost $29.3 million on sales of $184 million. (Demand has a second set of numbers using its own, non-GAAP accounting scheme that shows a profit of $25.6 million last year. What that means, I'm not sure, but it isn't the same thing as being "profitable as hell.")
Now, I know that Demand Media is supposedly the future of the way content will be created on the Internet. But I have to wonder: if a company can't make money when it is one of the most popular web properties--more traffic than ESPN, NBC, and Time Warner's websites put together, says Wired--when will it ever make money?
Maybe Demand Media's algorithms will allow it to turn a profit once it reaches an even larger scale--and the company has certainly attracted an a-list underwriter in Goldman Sachs. But the business of content farms, which has become very popular these days. also presents risks, as Danny Sullivan notes. And Newsweek still has Fareed Zakaria, a strong brand, and more than a million customers. And the whole company is selling for just a buck!