Regular readers of this blog know that I've been skeptical of Demand Media, which has for years been crowing about its profits—cowing the likes of Wired to describe the company as "profitable as hell"—when it in fact lost tens of millions of dollars in 2009.

This came to light earlier this year when the much-ballyhooed company, which produces low-cost how-to content, filed to go public. Oops: It turned out that Demand, despite paying almost nothing for the articles it distributes, was only profitable if you used an invented accounting system not recognized by the SEC or by normal GAAP practices.

For most of 2010, Demand refused to explain exactly how it figured itself to be profitable, but just before the Christmas holiday (read: a perfect time for burying awkward news) the company amended its IPO filing with a more detailed explanation: Unlike most media companies Demand is amortizing its editorial expenses over five years. The reason for this, as Kara Swisher explains, is that "Demand has determined that its content has a more evergreen nature, compared to more topical–and perishable, from a revenue point of view–material produced by others."

In other words, Demand (and its boosters) think that articles like "How to Belch" will have longer-lasting value than, say the Washington Post's Walter Reed expose. And then there's the question of how Demand decided that five years was the right number. As the company notes in the filing, a minor change in this estimate would have a dramatic impact on its business:

For example, if underlying assumptions were to change such that our estimate of the weighted average useful life of our media content was higher by one year from January 1, 2010, our net loss would decrease by approximately $1.6 million for the nine months ended September 30, 2010, and would increase by approximately $2.4 million should the weighted average useful life be reduced by one year.

That's a lot of uncertainty for a company that is supposedly printing money. The venture capitalist (and Tripod founder) Bo Peabody explains why this is problematic, and predicts that the company will eventually withdraw its IPO and rely on private funding until it can get its revenue model right.

Demand claims that because their content is so valuable over such a long period of time the costs of producing it should be recognized over that same period of time. This time period is decided by Demand, which allows them to make their current cost structure look as good as they need it to.[Five years] might make sense if Demand broke out its advertising revenue by time (it could certainly do this) and demonstrated that the revenue associated with each piece of content follows this same five-year amortization schedule. But Demand doesn't do that because it's likely not true. Rather, given the very nature of Demand's arbitrage, it's likely that the majority of the revenue generated by each piece of content is realized within the first year of its life, if not sooner. The long tail of content is interesting. The long tail of revenue is a myth.

UPDATES: I missed it, but Matt Quinn was all over this news. Meanwhile there's some really interesting stuff going on in the comments of this Henry Blodget screed. Some people who claim to be Demand freelancers point out that a lot of the content, for instance, "How to Download Music to a Cell Phone," won't last anywhere near five years.