Demand Media started trading on the New York Stock Exchange this week, making it one of the first IPOs of 2011 and certainly one of the largest media IPOs that will be seen all year.
The company-which has a network of 13,000 freelancers generating thousands of articles for sites such as eHow, earning about $10 to $20 apiece–sold 8.9 million shares for $17 each earlier this week, up from the 8.6 million shares at $14 to $16 each originally proposed. Today, stocks were trading at $22.27, giving the company a market capitalization of $1.9 billion, exceeding that of the New York Times Co. at $1.5 billion.
The company has bankers and dot.com giants singing its praises (Bloomberg Businessweek quotes Facebook COO Sheryl Sandberg saying of Demand Media, "They really understand consumer behavior on the Web and how to build businesses on it").
Despite the accolades, Demand is still searching for a profit, posting a $6.3 million loss in the first nine months of 2010. And it may have to square off with the largest dot.com of all in the near future, one that happens to be supplying a potentially disproportionate amount of revenue for the "content farm."
Last week, Google principal engineer Matt Cutts posted about changing Google’s algorithm in response to improving search results. "As ‘pure webspam’ has decreased over time, attention has shifted instead to ‘content farms,’ which are sites with shallow or low-quality content," he wrote. "In 2010, we launched two major algorithmic changes focused on low-quality sites. Nonetheless, we hear the feedback from the web loud and clear: people are asking for even stronger action on content farms and sites that consist primarily of spammy or low-quality content."
Scout Analytics, a firm working with publishers to determine the revenue potential of their audience, has doubts about the long-term viability of the Demand model. "If you take what they say about uniques–86 million–and break down revenue per user, that’s $1.60 per user," Scout Analytics senior vice president of strategy Matt Shanahan told FOLIO: last year. "Look at how many page views they have over a year and how many users they have to accumulate over time. All it takes is an SEO engine to change their algorithm and they lose their traffic."