Demand Media Plunges as Google Continues Crackdown on Content Farms

Jacob Harper |

ehowDemand Media’s (DMD) seemingly parasitic relationship with Google might be coming to an end. Demand is considered a leader in creating “clickbait”: articles and videos content with provocative or interesting titles, cheaply produced, and usually of low quality. This practice has generated millions of dollars in ad revenue for Demand. But as Google seeks to improve the quality of content that shows up in their searches, content farms like Demand are in serious trouble.

Demand just bought e-commerce site Soecity6 for $94 million. But suddenly branching into e-commerce might be too little, too late. Demand’s stock plunged over 21 percent to $6.45 a share, and is down almost 50 percent from a year ago.

Demand’s Wild Ride

Over the last four years, Demand’s fortunes have turned sharply downward. In July 2008, Demand reportedly turned down a buyout offer from Yahoo! for between $1.5 and $2 billion. In 2009, Demand claimed a profit of $200 million (though this number is debated.)

But that was before Google began targeting companies that excessively employed “search engine optimization,” otherwise known as SEO, wherein a company “games” Google by using keywords and provocative titles to get their content to the top of searches. In January 2011, Google principal engineer Matt Cutts told CNET that the company would employ crowd-sourced feedback and other metrics in hopes of penalizing low-content sites that engaged in aggressive SEO tactics.

That same week, Demand Media held their IPO at $17 dollars a share. Two years later, they’re worth almost a third of that.

Quantity is the Name of the Game

Nobody produces SEO-targeted content quite like Demand. The company uploads between 10,000 and 20,000 videos a month on YouTube (GOOG), and owns hundreds of thousands of articles via brands like Livestrong, Cracked, and eHow. But as Google refines their algorithm, that content is being seen by less and less people, and the AdSense bucks have quit rolling in.

As a result, Demand has revised down its second-quarter forecast. Flagship site eHow has been hit hard by the algorithm changes, and Demand’s revenue is expected to be in the range of $100 million to $101 million compared with the previous range of $105 million to $107 million.

The Downturn of the Content Farm Model

Demand might be the biggest name in low-quality content produced en masse by inexpensive freelancers, but they’re certainly not the first. Associated Content, purchased by Yahoo! (YHOO) in 2010, was long considered the leader in content farming. But when Google started filtering out low quality content, Yahoo retired the brand, and over 75,000 articles with it. Associated Content is now known as Yahoo Voices, and all content now must meet their submission guidelines.

Huffington Post, owned by AOL (AOL), has also been targeted for their mass content produced on the cheap. In 2012, HuffPo was sued by unpaid bloggers seeking compensation for their work, and was forced to address the use of content farm practices publicly and revise their model. Examiner.com, Mahalo, Squidoo and Suite101 have also been subject from increased pressure to up the quality of their content, less they continue to drop down Google’s search engine.

Demand Moving Forward

Besides producing cheap content, Demand also has a $200 million domain name business, which “squats” on popular domain names. But that business is faltering as well, and Demand plans to spin it off by the end of the year. Demand has recognized the need to abruptly switch gears and quit relying on Google for revenue. Hence the acquisition of Society6 and earlier this year, e-learning company Creativebug.

But investors still appear skeptical. Demand is experiencing a massive sell-off, trading at 10 times normal volume. Whether Demand can turn the ship will probably rely on their ability to diversify out of the content farms that made them infamous -- and fast.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
DMD Demand Media Inc. n/a n/a n/a n/a
GOOG Alphabet Inc. 750.50 2.58 0.34 1,452,484
YHOO Yahoo! Inc. 40.07 0.44 1.11 8,588,544
MFRM Mattress Firm Holding Corp. n/a n/a n/a 0

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