For the past six months, the folks at Demand Media (DMD) have had to sit back and take it as one critic after another has shredded the company for a litany of perceived sins.But now, thanks to its highly successful IPO last week, Demand gets the last laugh.
The company raised ~$85 million through its IPO (excluding the proceeds to selling shareholders), and it now has a market capitalisation of ~$1.7 billion, which is far higher than most people expected.
Both the cash and the market cap are huge competitive assets in a highly fragmented digital media industry. They will also allow Demand to quickly address its major weaknesses and risks.
Demand’s critics have homed in on three areas:
- The company’s “content farm” freelance production model, which critics contend is ruining the world by flooding the Internet with low-cost McContent
- The company’s extreme dependence on Google for search traffic and monetization, especially in light of Google’s recent remarks about punishing content farms, and
- The company’s accounting, which capitalises editorial costs and spreads them over five years–thus making the company “profitable” when standard media accounting would not.
Thanks to its IPO, Demand is now in a position to rapidly address the first two concerns. And unless the stock tanks, the third one is irrelevant. (The market has spoken, and it’s fine with Demand’s accounting–at least for now).
How can Demand address the first two concerns?
By using its cash and currency to buy some high-quality premium content sites to complement its main site, eHow. And according to Nicholas Carlson, this is exactly what it plans to do.
By buying premium brands, Demand will accomplish three critical things:
First, it will lessen the “low-quality” complaint, which has always been more perception than reality. (In our opinion, this diss has always been mostly wishful thinking on the part of the media establishment, which gets paid a lot more to create similar content.) By combining premium branded editorial content with its freelance production engine, Demand will have the best of both worlds: Big recognisable media brands and stars combined with vast libraries of low-cost reference content. The combination of these two is more powerful than either one on its own.
Second, Demand will develop powerful new sources of distribution, namely direct traffic to the branded sites and social traffic to the high-quality branded content (which, in turn, will drive additional traffic to the reference content). This will significantly lessen its dependence on Google for traffic.
Third, Demand will have a much easier time selling premium display advertising to big brands, which prefer buying advertising on premium branded sites. By buying big brands, Demand will be able to “house” its reference content on branded domains, which should radically increase the amount advertisers are willing to pay for it.
The company’s successful IPO won’t change its accounting, of course, which has always been my biggest beef with the company (see details here). But the market has spoken, and for now it doesn’t care that Demand’s accounting paints a radically sunnier picture of the company’s performance than standard online media accounting.
If/when the company stumbles, the accounting issue will likely rise to the fore again, and we expect the company might eventually change it (the way AOL stopped capitalising marketing costs in the late 1990s–a step that eliminated one big controversy around the company and paved the way for it to become a blue-chip name). But for now, no one cares.
In any event, the IPO has silenced Demand’s critics, at least temporarily. And it has given Demand competitive weapons that it can use to address its weaknesses and dominate the emerging next-generation digital-media industry.
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