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BRINGING INNOVATION TO MARKET

More Questions About Demand Media

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Wired finally addresses the questions raised on this blog and, subsequently, in the Wall Street Journal, about the supposed profitability of Demand Media, the controversial media company that purports to have figured out the elusive key to making money with online content. Cue the walk-back:

In late 2009, Wired was induced to describe Demand Media as 'profitable as hell'. This simply wasn't true, at least not under GAAP, the collection of accounting rules that the Securities & Exchange Commission forces publicly-traded companies to use. In fact, Demand's IPO prospectus reveals that the company has delivered losses every year since its launch in 2006, running up an accumulated deficit of $52 million.

And then this damning conclusion:

Yet even when you accentuate the positive, the nagging doubts won't go away. Is being really good at search engine optimization and selling large amounts of low-value inventory really so revolutionary? 'You can put lipstick on a pig as often as you like,' one digital advertising executive tells me, 'but monetizing low-quality inventory remains a very, very tough business.'

Ouch. The bottom line, as Wired's blog post elegantly argues, is that we know very little about the way that Demand generates revenue—and as a result its very hard to know whether it will ever be able to turn a profit. Instead, we have to rely on boosters like Internet luminary John Battelle, who posts a full throated defense and says that Demand's IPO represents a referrendum on Google's business model.

I can't say I agree. Whereas Battelle seems to think the two companies are complimentary, I think the relationship is more parasitic. As I see it, Google creates an audience and Demand gloms onto that audience by churning out stories by writers who are paid absurdly low rates. Demand boosters argue that the company is set apart by its algorithms, which determine which search terms are popular and then assign writers to cover a given topic.

The problem is that there's no algorithm to prevent bad writing. When you pay below-market rates, you get below-market content. (See "How to Belch.") And when you get below-market content that, thanks to some genius search-engine optimizers, finds its way to the top of a Google search page, Google gets worse. That could prompt the search engine to start ranking Demand's content lower. (Don't think that Google's embrace of old media is about being a good citizen; it's about getting good content at the top of the search page.)

It's possible that Demand Media will turn out to be "profitable as hell," as Wired has claimed, but I think there are a lot of reasons to be skeptical.




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