Why I will NEVER Invest in Demand Media – Digital Sharecropping

Demand Media is an internet technology company that is responsible for content creation as a service to multi-national clients as well as its portfolio of internet properties. It also owns the second largest domain name registrar in eNom. It purchased Name.com, another popular registrar in January 2013.

Demand Media Exploits an Excellent Business Model – Internet Marketing for Ad Revenue

Demand Media has found an incredible business niche in long tail keywords. This business model caters to the growing number of queries or detailed and specific requests internet users type into Google or Youtube. The general idea is, if users are looking for something very specific as opposed to something very broad, advertisers can be more targeted. Not only are advertisers more targeted but, users are more likely to click the ads because of their relevancy.

Now, this is nothing new. Google has been featuring targeted advertisements to its users for years and you can see how well that has worked for this company. Unlike Google, Demand Media though produces and owns the content. Google just provides it.

Further, Demand takes advantage of an incredible employee – the average internet user who needs an extra buck. The majority of the content written, recorded and captured on behalf of Demand Media’s portfolio of websites is provided by those who are unemployed, part time workers or the average college student. With this, costs are incredibly low as freelancers are continually underbid by content creators from Asia and Eastern Europe. Articles are written for as little as $1.

Problems with this Business Model – Digital Sharecropping 

Many of the methods Demand is using to create revenue for their sites, in the form of advertising, is reliant largely on what is known as “digital sharecropping.” Remember that incredibly successful Google I mentioned earlier? Bring a little bit of Yahoo and Bing into the mix as well.

These search engines represent a form of sharecropping unique to the internet world. By this, I mean that Demand’s websites rely far too much on search engines and their corresponding algorithms to provide the content which they can make revenue on with ads. No one in their right mind would actually visit a Demand Media site, by their own admission. They allow Google to lead them there in the first or second result. You will notice, once they arrive, their question is not answered and they are bombarded with ads.

To see this in action we can look at the number of algorithm changes Google goes through in an effort to prevent websites from gaming the system or over-optimization. Their goal is to provide for their users which in turn should satisfy the advertisers. Thus, changes occur on a somewhat semi-annual basis. They are directly targeted at companies like Demand, who continually try to optimize their sites with keyword stuffing and interlinking.

During the 3rd quarter of 2012 Demand saw this wraith first hand when its flagship website, eHow.com experienced numerous downgrades in the search engine results (SERPS) for its thousands of pages aimed at helping people with “how tos.” It was labeled as a “content farm”, otherwise known as a website which interlinks and constantly links back to itself in an excessive amount that is neither relevant nor helpful.

Thus, a perfect example of digital sharecropping. Because demand relies on no other source for its traffic

Looking at the Future of Demand Media

Domain registrations, which look to see an increase in business, not only because of the recent acquisition but also the new TLD’s that are coming out – will provide steady income for Demand. However, without the advertising revenue, the company will miss earnings estimates. Thus trading Demand between quarters can really wreck the stock price depending on how the company’s websites are hit by Google.

Demand may see a diversification in its business not only in domain registrations but, if it would be able to see a broader range of traffic to its websites, not exclusive to Google. For example, paying users to send Facebook friends, retweets, pins, etc. instead of writing more junk articles could prove to be immensely more valuable in the long term.

Regardless, production costs for its content are incredibly low. This should be seen as an asset. I have to wonder how long though they will get away with purchasing content at such a low price. If and when the economy picks up, qualified writers and content producers will find better work elsewhere. Reliance on non-educated and non-native English writers has been known to ruin many websites affiliate marketing and ad revenue.

Comments

  1. I think you are right on the DMD business. I own the stock as a buy-write covered call play and cannot wait until the stock is called away.

    • Thanks for the comment Martin. One of my favorite types of analysis is looking right at the business model. This one just relies far too much on good favor from Google and to a certain degree Facebook, Youtube and Twitter. Domain name registrations provide a little bit of a cushion but, I think that technology is changing too quickly to warrant any long term outlook. Keep me updated on your position if you find anything interesting.

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