Demand Media: Crapification — Part 2

This is part two of  a longer note on inter­net con­tent in gen­eral and Demand Media in par­tic­u­lar.  The full report can be down­loaded with this link: Demand Media Crapi­fi­ca­tion.  Below is the sec­tion on DMD along with a link to our Intrin­sic Val­u­a­tion of $30.

The launch of the Demand Media IPO pro­vides a detailed look at the mas­sive machine whose pur­pose is to make money by serv­ing con­tent with a high affin­ity for adver­tis­ers and click­ing con­sumers. First they fig­ure out what peo­ple are search­ing for, inter­sect that with what adver­tis­ers are inter­ested in, and then use a free­lance team of thou­sands of con­tent cre­ators to write arti­cles that will rank highly in search results and draw clicks on paid adver­tis­ing links.

Although the com­pany takes pains to demon­strate that they do, in fact, pro­duce some decent con­tent that pro­vides com­plete and unique answers to some queries (like “how to draw a bas­ket of fruit”), the vast major­ity is basi­cally a page with a blurb of text sur­rounded by lay­ers of advertising.

Fun­da­men­tally, Demand Media is an upgraded, well-capitalized and pro­fes­sion­ally man­aged ver­sion of other con­tent farms. They are not try­ing to fool any­one with their state­ment: “Our Mis­sion is to ful­fill the world’s demand for com­mer­cially valu­able con­tent” (empha­sis added). Demand Media brings more tech­nol­ogy and resources to this enter­prise than the myr­iad “small time spam­mers” out there but, in the end, they exist only to push out con­tent that gets clicks. The con­tent is cur­sory, some­times cut and pasted from else­where, and all the time buried in piles of adver­tis­ing. It’s cer­tainly not the rich, high qual­ity con­tent users want.

Demand Media is a giant sens­ing and pro­duc­tion engine. They col­lect and ana­lyze a huge amount of data and then use their pro­duc­tion engine, Demand­Stu­dios, to pub­lish 4,000 “arti­cles” per day from over 10,000 writ­ers. The com­pany lists arti­cles like “how to become a stock­bro­ker” or “how to look sexy in a bathing suit” that can be writ­ten in exchange for a $15 fee. Com­bine inane ques­tions with unin­formed arti­cles by the masses and you have a recipe for a pile of insipid web pages. The last step insert ads on top, both sides, the bot­tom, and weaves them into the text to com­plete the exercise.

Of course, an elit­ist view of con­tent can lead to miss­ing some great invest­ments. YouTube had plenty of garbage on it to start with. Many blogs and instant mes­sag­ing traf­fic streams can be just as content-light as Demand Media sites. There are also com­pa­nies like I Can Has Cheezburger, which has been extremely suc­cess­ful by deal­ing unabashedly with sites that pro­vide silly con­tent. Their sites com­prise a vast net­work of dis­tract­ing and use­less sites like LOL­cats. There’s real money to be made online by giv­ing peo­ple fun, dis­tract­ing or enter­tain­ing content.

Unlike these other com­pa­nies, how­ever, Demand Media is not try­ing to enter­tain but instead to inform and do so with the sole intent of dri­ving adver­tis­ing clicks. This cre­ates what can only be called spam.

Unin­formed search algo­rithms like Google’s will return enough of these results to fill the first page or two of a screen. Most of the time it’s not obvi­ous to users that the results are spam until they click on them. Google sees this as “Another happy user clicks on this link. We’re the best!”

Whether one is happy about what Demand Media is doing is beside the point from an invest­ment per­spec­tive. Sim­i­lar argu­ments were made con­cern­ing Quin­Street (QNST — $23) after their IPO, but in our view a year ago the shares were under­val­ued at $13. Demand Media has an attrac­tive busi­ness even though we think inno­va­tions in search tech­nolo­gies may make parts of it harder to mon­e­tize. Our Intrin­sic Val­u­a­tion model for DMD sug­gests a $30 stock price.

Quin­Street took time to prove their model to investors. After a solid IPO early in 2010, the shares reached $17 only to fall back to $10 by the sum­mer. Sub­se­quently, how­ever, the com­pany has exe­cuted on their strat­egy and now the stock is more in line with their IV at $23. Last year we saw sim­i­lar stock dynam­ics for Ancestry.com and Higher One Holdings.

In order to shed more light on what will help improve infor­ma­tion con­tent on the web, our next post will look at Quora, another player in the online con­tent space that has been turn­ing heads within the “tech-noscenti” and is begin­ning to enter the mainstream.

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Tagged as: Associated Content, Content farm, Demand Media, eHow, Google, Initial public offering, Search algorithm, YouTube