Friday, August 20, 2010

Demand Media's Patents

In an odd way, I'm a fan of patents, so this blurb in the Demand Media prospectus caught my eye:

We also take steps to protect our intellectual property and, as of June 30, 2010, we have been granted five patents by the United States Patent and Trademark Office and have 19 patent applications pending in the United States and other jurisdictions.

What patents, you wonder? So did I. Here's what I came up with, and my apologies for some of the oddly-truncated titles...


Saturday, August 14, 2010

A Billion Pennies, or Show Me the Abrahams

Every time someone on the web visits a Demand Media website, the company earns two-thirds of a penny.

DM had 9.7 billion page views in the first half of 2010, bringing in 6,629,000,000 pennies. For the arithmetic-challenged, that's $66.29 million.

Two-thirds of a penny per view. That's the part of the Demand Media business model I just don't get.

Two-thirds of a penny ain't much! It's the type of ad revenue a decent blog gets. For my own pages, a collection of websites, blogs and online content, I generally shoot for -- and usually get -- income of a penny-per-view.

Even the articles I've written for eHow, which are all part of DM's vast empire, are earning me about 1.5 cents per view, meaning DM is getting a good deal more -- probably about 3 cents per view, assuming there's a 50/50 split of the revenue -- at least for that little chunk of content.

So why is the company's overall RPM (revenue per thousand views) seemingly so meager? And what does that mean for their IPO prospects?

DM's prospectus divides their content revenue into two big chunks, income from site like eHow that are "owned and operated" by DM, and income from their "network of customer sites" like and the San Francisco Chronicle.

Their owned and operated sites get a decent 1.2 cents per view (first half 2010 earnings of $46.06 million on 3.9 billion views), and both views and RPM increased about 20% over the year before.

Their customer network adds up to a lot more views, probably an indication of the popularity of the sites they're teaming up with, but due to shared revenue, a much smaller RPM. Demand Media earned $19.66 million on 5.8 billion views, or 1/3 of a penny per view. These views, too, grew by a big chunk (24%) over the prior year, but RPM only increased 6%.

The bottom line here is that DM's less-than-a-penny-per-view revenue puts their earnings on par with about a zillion bloggers and website owners running Adsense on their pages. Where's the earning boost of the much-vaunted secret algorithm that DM uses to select titles and maximize income?

I suspect that what's happening here is a large dilution effect of some sort. DM probably has a billion or so core views that are earning very well...more like a nickel per page than a penny per page. But at the same time, the company is spending effort and cash on bringing in billions of other views that, so far, aren't doing much on the earnings front.

This is where the crap-shoot part of the whole IPO comes into play. Unless DM can substantially increase revenue to something like two pennies per view, it's hard to see their content machine cranking up a profit. Down the road, as an ever-larger proportion of their views comes from established (and essentially cost-free) content from prior years, hopefully that's exactly what the company can make happen.

Wednesday, August 11, 2010

Demand Media's Library

"Our wholly-owned content library consists of approximately 2 million articles and approximately 200,000 videos as of June 30, 2010, and during the quarter ended June 30, 2010, we produced an average of over 5,700 new high-quality text articles or videos per day."

DM's library is their bread and butter, at least on the content side of the business. They have 2.2 million articles and videos at the moment and at almost 6,000 new pieces a day they'll add (do the math!) another 2 million per year. In other words, by June 2011, their content library will have doubled, and perhaps their content revenue will as well.

I write for Demand Media as a freelancer, and they pay me $15 per article (I try to write them in about 20 minutes, but don't always make it).  There's a slew of title selection folks and editors that also put their hands on each article, so let's say DM's upfront cost for the articles I write is about $20.

They also pay a few writers more for premier articles and pay many writers less (much less) for shorter blurbs that are only 50 words or so. Let's say an average piece, then, costs the company about $10. Their 2 million new articles a year will run them $20 million in upfront cash. (I'm not sure where this cost appears in their prospectus...the "service costs" and "product development" line items are the right scale, but the descriptions of these categories don't appear to cover writers' fees. Anyone know?).

Most of DM's material is on eHow at the moment, although that looks to be changing in the years ahead. eHow hosts 1.4 million (out of 2 million) articles and 150,000 (out of 200,000) videos. eHow also accounted for 21% of DM's total revenue in the first half of 2010, and since half the company's income come from their registrar business, eHow looks to have accounted for more than one-third of revenue on the content side of the business.

 By the numbers, it looks like this:
  • $114.0 million...Total 6-month DM revenue (through June 2010)
    • $ 66.3 million...Revenue from content side of the biz
      • $ 23.94 million...eHow's contribution (21% of total, 36% of content)
    • $ 47.7 million...Revenue from registrar side
eHow is a top-20 ranked website in the U.S. and will play a large role in DM's future. They've even launched an eHow-UK site that gets 2.5 million unique viewers a month. It's hard to glean what the future cut will be between eHow content and content for other DM properties and customers, but in 2Q 2010, only 60% of new content went to eHow. For the moment, content at eHow does better, revenue wise, than content at other DM sites, but I'm sure the company hopes to change that down the road.

'Til next time...

Monday, August 9, 2010

No Go on the Logo

Sorry, DM, but I am not digging the new logo:

Who knows? Maybe it will grow on me.

Working Through the DM Prospectus

I want to work my down through the Demand Media IPO prospectus, starting with:

"Our mission is to fulfill the world's demand for commercially valuable content."

Whoa! That's ambitious. Not as ambitious as Google, who wants nothing less than to organize all the world's information. But it's a pretty danged big bite of the pie, just the same. Can they do it? That depends on their strategy for growing their business.

Depending how you count, Demand Media consists of two, or three, or four distinct business segments.

First is their Registrar business. DM owns eNom, a large website registration business that registers about 10 million domain names a year; domain names earn the company about $10 bucks a pop. DM owns about another half million domain names outright.

Second, is what DM calls their "Content & Media service offering". You can count this as one business segment, if you like. You can count it as three distinct operations, they way DM does:
  • Content creation
  • Social media applications
  • Monetization tools
From what I can tell, though, the "monetization tools" isn't a business service, so much as what DM uses to make money on content creation.

And the "social media applications" is a reference to Pluck, a DM service that powers forums and online communities (and didn't do a very good job of it at eHow) and seems to be a very minor part of DM's overall revenue...the Prospectus doesn't even mention any income generation from this aspect of their business.

So to my mind, we're left with two key businesses at DM, the Registrar and Content Generation. And even though the Registrar has accounted for as much as half of DM's income, to my mind, it's the content generation piece that is the future of this company. It's right there in their mission statement, after all: fulfill the world's demand for commercially valuable content.

More on that later.

Sunday, August 8, 2010

Demand Media's Going Public

In case you hadn't heard, Demand Media filed a prospectus with the SEC to announce their IPO. They're going public.

Maybe you know who DM is, maybe you don't, but in some internet/advertising/future-of-journalism circles, DM is a big deal, and either the next new wave on the internet, or the death blow to newspapers as we know them, or all of the above.

But whatever you think of them, the Demand Media IPO will probably be a pretty big deal. I've decided to look into their not-yet-profitable operations (I might actually invest!) and read through their IPO in detail. And I thought to myself: Do it online! Think out loud! Write a blog!

So here it is.