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Epic Fail: The Rise and Fall of Demand Media

The future of the so-called "content farm" looks bleak as its search-centric biz crumbles

Take note, Twitter: Not every tech company has a happy ending after a ballyhooed IPO.

Just look at Demand Media, the Santa Monica, Calif.-based firm some thought would revolutionize content production. Not long after the company went public in January 2011, its market capitalization soared to more than $2 billion, sending the then-5-year-old firm’s value briefly past that of the New York Times Co.

Compare those heights with where Demand finds itself today, having plummeted to roughly a quarter of its peak value. Revenues for the most recent quarter were down year-over-year for the first time since that IPO. Co-founder Richard Rosenblatt is no longer CEO as of October, and the search for his replacement is under way. Demand and Rosenblatt declined comment.

The chief exec’s role will be tough to fill given how steeply Demand has declined over its seven-year run. Changes in Google’s search algorithms have twice hammered the young company in recent years, leaving its few brands that managed to get significant marketplace traction, including eHow.com and Livestrong, hemorrhaging traffic.

Now Demand’s focus is on spinning off the only healthy component of its business — domain registration — while trying to motivate its content brands’ rapidly eroding audience to spend money on its growing collection of unproven e-commerce ventures. Having quietly sustained several rounds of layoffs this year, the media side of the business is almost certain to be sold or taken private after the split.

The freefall of Demand serves as a cautionary tale for hype in the Internet age: No company burns so hot that it can’t cool off.

But Joanne Bradford, newly named head of partnerships at Pinterest, who left her post as chief revenue officer at Demand in May, believes the company’s struggles are symptomatic of those at many Internet content companies. “There’s a big challenge for all content creators to overcome,” she said. “I think Demand has done a very smart, focused job and now needs to figure out how to take it to the next level.”

In early 2006, Rosenblatt and Shawn Colo, a principal with private-equity firm Spectrum Equity Investors, birthed the idea for a new kind of startup, which came to be known pejoratively as a “content farm.” The operation created articles and videos quickly and cheaply, based on analysis of the most popular Internet search queries.

Rosenblatt was fresh off selling Intermix Media, owner of MySpace, to News Corp. less than a year earlier for $580 million, earning $23 million from the deal.

The idea with Demand was to marry two businesses: domain name registration and low-cost content production. The foundations were the acquisitions of eHow.com, a provider of how-to tutorials, and eNom, a domain-name registration service provider.

Early on, Demand used eNom’s 1 million generic domain names (such as “3dblurayplayers.com”) to serve up relevant ads to people searching for specific topics. These “domain parking” pages were immensely profitable, generating north of $100,000 per day, according to a former Demand exec who requested anonymity. “That’s $35 million-$40 million per year without doing any work,” the exec said.

But the tactic was fundamentally a bait-and-switch. Users landed on the pages expecting to find information on a subject and instead found an ad. To try to drive up traffic, Demand shifted its strategy, populating the sites with thematically related content. Counterintuitively, though, that decreased ad click-through, since people were reading the articles instead of the ads, according to the former executive.

Demand then continued to build out the content-farm strategy, treating the domain-name registration business as largely separate from the content-production arm. Paying contributors comparatively little — usually less than $20 for a single article or video — it built up a stockpile of content against which it sold targeted advertising.

That content ranges from “How to Tell Who Has Unfollowed You in Twitter” to “How to Pick Blueberries” (tip: “Tie a bucket to your waist”) on the company’s biggest website, eHow.

When it started, the concept certainly looked like it could scale and pick up massive traffic — and it did. In November 2010, Demand’s owned-and-operated websites represented the 17th-largest Web property in the U.S., with 105 million unique visitors who viewed 679 million pages that month.

As a private firm, Demand had raised a staggering $355 million in funding over two years from investors including Goldman Sachs, Oak Investment Partners, 3i Group and Spectrum Equity Investors. It mostly used the funds to acquire companies that would further the reach of its content network and domain name businesses. At the close of 2012, Demand reported owning 171 subsidiary companies. Whether it was ever profitable is still subject to debate, but the acquisitions fueled its valuation, which in turn attracted more funding even as actual growth seemed ephemeral.

The company filed to go public in August 2010, betting that investor excitement over its algorithmic approach would make it one of the Internet’s biggest media firms. Skeptics wondered whether Demand could really keep the content-farm engine humming over the long haul. But some industry analysts were bullish, predicting the model would be hugely disruptive in the media landscape.

“Demand is truly onto something big,” Wedbush Securities analyst Lou Kerner wrote in a November 2010 blog post. “We love the media side of the business as it marches its way to significant free cash flow generation.”

On Jan. 26, 2011, Demand went public. Shares closed up 33% on the first day of trading to yield a market cap of around $1.5 billion.

That led to a brief mania around the content-farm approach. During its ascent, Demand had several copycats as well as interest from incumbents in buying the firm: Both AOL (then part of Time Warner) and Yahoo kicked the tires on Demand early on.

But less than three months after Demand’s IPO, the wheels began to come off.

The reason: Google made fundamental changes to its search algorithm to deprioritize results from what it called “junk” and “spam” websites. Under Google’s new algorithm, code-named Panda, companies that produced lots of content got penalized.

By April 2011, third-party measurement services were reporting that the Google changes had reduced traffic to Demand sites by as much as 40%. Demand issued a statement that the reports “significantly overstated the negative impact” of the change, but the stock took a dive — plummeting 38% over two weeks — from which it has not recovered.

“Panda came, and that just scared the shit out of all the investors,” the ex-Demand exec said.

Saul Hansell, who briefly ran AOL’s aborted attempt at a content farm, Seed.com, before moving on to news-video aggregation startup Sii.tv, believes the decline of Demand stems from a lack of quality control. “Using cheap freelancers who don’t have the expertise doesn’t work,” he said. “The cumulative effect was that millions of people went to eHow and other sites, and realized they didn’t really have the answer to their questions.”

Demand did its best to regroup, only to have Google make another algorithm adjustment last November that knocked the company for a loop all over again.

While still the 25th most popular site on the Internet and on mobile in the U.S., Demand is bleeding out fast. The number of unique visitors across its entire network of sites has sunk 56% over the past year, to 52.1 million in October. While Demand either owns or is affiliated with dozens of dotcom brands, eHow is far and away its biggest source of traffic, comprising 46.1 million uniques of its October total — down 35% from the same month last year. Perhaps the only other brand under the Demand umbrella with a significant audience is health site Livestrong, which has a user base of 9.8 million (when separated from eHow Health) — half the audience it had in October 2012 (the site broke ties with disgraced cyclist Lance Armstrong just one month after that, having released strong third-quarter results).

“The content business is still producing a lot of cash — it’s just not growing,” Evercore Partners analyst Douglas Arthur said.

Despite the declines, Demand is intent on funneling its remaining audience into e-commerce opportunities. The crafts channel on eHow, for instance, is being used as a platform for a small acquisition made in March, Creativebug, which offers lessons in everything from sewing to gift-wrapping. Demand also has leveraged eHow with a live-expert service, eHow Now, which lets users chat with experts of various stripes in real time for a fee. In June, it acquired e-commerce site Society6 — which sells apparel and tchotchkes — for $94 million in cash and stock.

Demand has attempted different iterations to try to create better quality content. For example, in 2011, eHow.com cut a deal with Food Network personality Rachael Ray, who was supposed to bring her fans to the website. It had a similar pact with supermodel Tyra Banks for a fashion and beauty site called TypeF.com. Both deals withered as celebrities proved to be a lackluster draw for editorial content.

Search isn’t the only place Google has stymied Demand. The company created three of the dozens of channels that Google subsid YouTube spent at least $100 million to fund in 2011, only to discontinue that funding.

To add insult to injury, Demand saw three key executives from its original team score big in online video production — but only once they left the company. Steven Kydd, Larry Fitzgibbon and Joe Perez launched foodie video hub Tastemade, which attracted $10 million in Series B funding in March.

Another original Demand player, Colo, is serving as interim CEO until Rosenblatt’s replacement is found. Rosenblatt declined to comment on the circumstances of his departure; reports range from his being ousted by the board to his leaving of his own volition.

Meanwhile, the company intends to spin off the domain-name services business, to be rechristened as Rightside Group.

Wall Street analysts wonder where Demand ultimately will end up in the coming months. The new CEO will have to quickly figure out a strategy to point Demand’s media business toward growth and profitability — otherwise, the company could be headed for a fire sale if its value keeps eroding.

“It’s getting late,” Arthur said.

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