Demand Media, a content mill

Via The Browser, this was an excellent article on one of the companies which manufactures superficial web content to draw interest from Google searches.  Three bits:

On Jan. 25, Demand Media sold 8.9 million shares at $17 each in an initial public offering. The following day, the price rose 35 percent to $22.61, which would give the company a market capitalization of $1.9 billion, greater than New York Times Co.'s (NYT) value of $1.5 billion.

And:

Many analysts now say the best way to gauge a Web company's financial hardiness is to look not at page views or monthly unique visitors but at how much money it can generate from each user. Matthew Shanahan, senior vice-president of strategy for Web consulting firm Scout Analytics, says thriving digital ventures typically have a high ARPU (average revenue per user). Amazon.com (AMZN), for instance, makes on average $189 per unique user. Google (GOOG) takes in around $24. Web publishers, Shanahan says, tend to become reliably profitable at about $10 a user. Demand's average revenue per user currently hovers around $1.60.

And:

Last year, Demand Media executives told Wired magazine that the mechanized assignments generate 4.9 times more revenue than ideas generated by humans.

The company employs 13,000 freelancers.

Comments

@ Rahul: presumably it's that Google is delivering some portion of the ads on Demand Media's pages.

Any theoretical search adulteration agreement with Google would probably result in revenue for Google, not Demand Media.

Many times these sites junk up Google searches to the point of uselessness. I wonder at what point this will harm Google.

So what's the Average Revenue Per User for Marginal Revolution?

>>>Many times these sites junk up Google searches to the point of uselessness. I wonder at what point this will harm Google.<<<

I suspect google will provide an opt-out at some point. e.g. You can specify that you never want to see ehow.com and a list in search results.

Interestingly, ehow.com is already in wikipedia's universal block list. If you try to link to ehow from a wikipedia article it will fail.

Important technical note: comparing market capitalization between two companies to illustrate the total value of the company doesn't make any sense. The proper comparison is enterprise value, which incorporates net debt.

It's like saying, "My house worth $600k with no mortgage is twice as valuable as my neighbor's house which is worth $1m but has a $700k mortgage." The important comparison is the value of the asset, not how it is financed.

For the record, New York Times has an enterprise value of $2.2b vs. Demand Media enterprise value of $1.5b. I estimate that roughly 40% of the New York Times' enterprise value is its ownership of About.com.

Very interesting read. I too hope that Google will at some point give users the ability to opt-out of content mill results.

On a side note, I also live in Georgetown Texas, with Byron Reese, the Chief Innovation Officer of Demand Media. I met him and his family once when he opened up his "restored Victorian home" for our Cub Scout den to visit. I remember looking up his name online later to see what he did and I found out about happynews.com and some of the other things he was involved in. Given that's not something I usually do with people, I can say that he certainly made an impression. I remember thinking that this guy was pretty creative and would probably do something big some day (big in $ at least...)

Nice guy BTW - at least for the 1 hour we spent together.

Revenue per user isn't nearly as important as profit per user. Sure, profit tends to correlate with higher revenue per user, but if you just look at revenue, you aren't taking into account how much it cost to generate that revenue. That's the difference between a workable business model and a money-losing one.

Damn, another reject from General Motors.

Employs freelancers? isn't that an oxymoron?

Then who pays freelancers at all?

Market cap does implicitly include the net debt of the company, but that's somewhat beside the point. The correct metric to use when comparing the value of two companies is Enterprise Value (Market cap + Net debt), not Market Cap.

Refer to my housing example above. The value of the house ("enterprise value") is not affected by how much mortgage debt one puts on it.

Here is another example:
Company A = $500m market cap - $200m cash + $0m debt = $300m Enterprise Value
Company B = $300m market cap - $0m cash + $400m debt = $700m Enterprise Value

Company B is "worth" more. The market cap is less only because the management has financed the company differently. This is another way of saying that the market is pricing the assets of Company B higher than those of Company A.

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