Demand Media + Google = Mutually Assured Destruction

This article was originally published as a guest post on Business Insider.

In my recent meetings with the leaders of top digital media organizations, executives have been unanimous in their bafflement over the impending Demand Media IPO.

Strategic thinkers know exactly what I mean: Demand Media’s “formula for success” is to select topics that only a statistician would love; produce low-quality content at absurdly low cost; and then drip spider-food pages into domains with a legacy of trust from Google built under prior ownership.

Once that’s done, Demand Media financially engineers its income statement to move what everyone else has called “cost of goods” below the line into depreciation; the intent here is to optically reduce expenses by spreading them over five years.

Reactions among media executives and entrepreneurs range from serious eye-rolling to violent throwing up. It’s instinctual rejection.

But why?

Because Demand Media violates the most basic definition of what “good” media is. Indeed, the formula that has built top media properties – from Disney to Glee to The New York Times – was simple: build a great brand on quality content, and then attract a loyal audience. And the formula worked for both analog and digital media, all the way up until the Age of Google.

But Google’s algorithm (Demand Media’s great ally) broke the formula by making every audience interaction with media separate and independent. Like Drew Barrymore in 50 First Dates, the Google algorithm has no memory of relationships; and for frustrated Adam Sandler publishers trying to build a loyal audience, the algorithm sets up an insurmountable amnesia.

Even worse, with every new Demand Media article, Google’s index gets more polluted, and the customer becomes even more underserved. It’s not an exaggeration, but Demand Media probably pollutes Google’s results more blatantly and thoroughly than the top black-hat spammers of the Web.

Then why doesn’t Google just downweight properties like this from its results?

There’s a good reason, and the catch is extraordinary.

Google’s network revenue, which includes its AdSense program – the advertising product that runs on affiliated publishers’ sites like Demand Media’s – accounted for $2.50 billion (30%) of total revenues in its most recently reported quarter.

So, if Google were to reduce the prominence of sites that use AdSense, its revenues and liquidity in the ad market would take a significant hit. And that would be intolerable.

On its side of the fence, Demand Media needs Google, too.

As Demand Media said in its recent S-1 filing:

“For the year ended December 31, 2009 and the six months ended June 30, 2010, we derived approximately 18% and 26%, respectively, of our total revenue from our advertising arrangements with Google … If any of our advertisers, but in particular Google, decided not to continue advertising on our owned and operated websites and on our network of customer websites, we could experience a rapid decline in our revenue over a relatively short period of time.”

The upshot here is that Demand Media is ruining Google’s search results; but Google, for its part, is actively perpetuating the rewards, encouraging Demand Media to keep its content just above a (very) low bar for high rankings.

I don’t blame Demand Media for being an opportunist and playing Google’s game.

But I certainly wouldn’t want to invest in Demand Media shares. The company is too precariously dependent for its lifeblood; and its spotty content quality has badly undermined its ability to earn brand loyalty. That’s a tough setup for a public company, and it makes for a very high-risk stock.

Google, on the other hand, bears more blame. As its quality of results goes down, so does its users’ quality of experience.

And the real competition isn’t just from Bing.

Earlier this month, a digital media executive told me that her 16-year-old niece prefers to search in

Facebook, since it prioritizes the content real people – i.e. her friends – like. Google’s results, she said, are useless and overwhelming. Facebook gives her the good stuff.

The unthinkable is actually happening to Google. Its algorithmic perfection is unraveling; and it has become the entrenched incumbent that is lagging in consumer experience.

And the challenge from Facebook is definitely coming.

The big question is how long Google can hold on to its revenues at the expense of its consumer experience.

Demand Media’s new shareholders will want to be the first to know. That way, they can get out front and sell.

27 thoughts on “Demand Media + Google = Mutually Assured Destruction

  1. Low-quality content aside (and yes, I agree), if Demand Media is actually depreciating their content creation (I think that is what you meant in the post) – how can wall street not see through that? Otherwise, there are a number of unprofitable online publishers who should be lining up to take their companies public.

  2. Pingback: Demand Media + Google = Mutually Assured Destruction | Ben Elowitz | Voices | AllThingsD

  3. Just because Demand cranks out thousands of articles daily does not mean the content doesn't rival top media publishers.Demand writers include former reporters and journalists from large media companies, PhDs, JDs and many with Masters in their respective fields. If journalists cared to research a bit, they'd find that Google isn't gunning for Demand. In fact, every time Google alters its algorithm to reduce spammy results, Demand moves up in rank.Demand has streamlined news, educational and instructional content. The content is high quality and appears on SFGate, the Houston Chronical, USAToday and more. The naysayers would be ahead by researching the Demand model and emulating it, as opposed to jumping on the bashing bandwagon.Just my two cents.

    • Andrea, thanks for playing a role as an apologist for Demand Media. I think it's helpful to hear the other side. Though your comments are certainly good PR for the company, I think they are quite suspect. 1. Despite Demand Media's recent denial, Google's Matt Cutts' recent post was clear: “We [Google] 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.” Demand Media is, without a doubt, the absolute most widely known content farm. 2. Until I stop landing on lousy eHow pages, I will trust the empirical evidence that the quality is spotty at best and lousy at worst. I'm sure there is some good stuff, too, as even broken clocks are right twice a day. But this Jeff Bercovici piece summed up that it's not just spotty content by chance – it's a systematic approach to creating lousy content that is still endemic. http://blogs.forbes.com/jeffbe…/3. As for emulating it, the last thing media needs is a bunch of sites trying to emulate Demand Media's formula. After all, copycats and fast followers typically produce even *worse* quality. Digital media is in a crisis. Surely your vision for a more successful media industry isn't so flat as to think that more search engine surface area is the answer. We have bigger problems to solve, like making publishing work with outstanding content and experiences.–Ben

  4. Pingback: So goes Google, so goes Demand Media | Business News- Market News- tweets

  5. “There’s a good reason, and the catch is extraordinary.Google’s network revenue, which includes its AdSense program – the advertising product that runs on affiliated publishers’ sites like Demand Media’s – accounted for $2.50 billion (30%) of total revenues in its most recently reported quarter.So, if Google were to reduce the prominence of sites that use AdSense, its revenues and liquidity in the ad market would take a significant hit. And that would be intolerable.”So your premise is because so much of Google's revenue is derivedfrom AdSens it can't afford to drop Demand.In 2009 Demand had $198M in revenue. It is up 25% this year. So lets call it $250M.60% of that is from Google (.26 * $250M = $65M).Being generous (to Google) we can figure Google pays 1/3 of the price of an ad served on Demand.So Google revenue from Demand is $130M, 5% of their AdSense revenue and 1.6% of it's total revenue.Factor in that removing Demand from Google search means another player will advance, covering someof the lost revenue, and the damage poor search results would do to Google's bottom line, Demand isn'tsuch a big deal.Besides that, you seem to have mischaracterized how bad the content from Demand is, and how big animpact that one site has on the overall Google search experience.That, and Google's history of forward thinking, giving up short term revenue to sustain the quality of itssearch, dumps your “extraordinary catch” theory dissolves.Your less than anecdotal support of your claim about Facebook's success in search is disgusting.Do better research, drop the conjecture, and maybe the free fall of your alreadymeager traffic will stop.

    • Hi John, You're right that the math particular to Demand Media isn't so severe as to be deathly to Google to make an adjustment. However, the issue is that the whole category of sites *like* Demand Media's. In aggregate, those sites are quite significant. Demand Media may be the among the largest and certainly most organized/sophisticated of them, but content farms and spammers represent a huge and fragmented category. To change the algorithm to disfavor traffic to that whole category of sites would be devastating to Google as a public company and a business. As for the quality, as I mentioned to Andrea above, I'll stop believing that Demand Media has spotty quality when I stop landing on lousy pages on its sites. Regarding Facebook and search, you can re-read above: “The challenge from Facebook is definitely coming.” That doesn't say they've been successful, and to date, search has not been significantly impacted by Facebook. “Coming” does not mean “here.”–Ben

  6. There's a larger problem here, the arbitrage of human talent.demand media knows more about the potential value of on article on a particular topic.They seek to maximise the difference between the cost and the revenue, how much they pay the content creator < how much revenue they predict they can makeit's like Hollywood, but on a mass scale.Demand Media is the new talent agent, although in reality the emphasis is on agent rather than talent.

  7. Pingback: Google Algorithm Change Gives Smaller Sites A Boost — The Dealer Blog

  8. Demand Media content is crap. One out of 50 articles has some merit, the rest are either trite, naive, half baked, biased, incomplete or tangentially relevant. This formula gets the advertiser click and drives the revenue machine.

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  12. Do Google have a duty of service to remove Demand Media content farm results from its index – not only for the poor quality for the content but also as a duty of care?People trust the content Google delivers to them almost blindly and in the UK it seems the National Health Service (NHS) doctors even use results to help diagnose patients.These results include Demand Media sites such as eHow.com and when these articles are factually incorrect, it is by proxy, potentially putting peoples health at risk!See http://www.epiphanysolutions.c…/ for the full article. Scray stuff…!!

    • Unfortunately, Google doesn't have a fiduciary responsibility to its users, or anything close to that. All it has is the option of tilting the search results in whatever way promotes its business, and hopefully its mission.

  13. This high rated craptent game is being played by Google for much too long now. I was a Google follower for a very long time now and was really hoping Matt Cutts speaks true words and finally let them become reality. But the result was only a bad joke (http://googleblog.blogspot.com…). I'm not using Google's search, because it isn't usable for me anymore. It's sad, but it seems the problem is due to its design. A users feedback wouldn't be Google anymore.For now the reflected user experience, like Ben Elowitz mentioned in his post, is not only realized by Facebook but also by search engines like Blekko.com. I'm pretty sure other will follow, and I'm also sure this will happen soon, since Google won't be able to readjust their ranking system that easily. Matt Cutts pointed out the adaption, as a result of the war on content farms, will affect 0.5 to 2 percent of all pages. Why not more? Because a major change would be like an earthquake to Internet's ecosystem. And there's a lot of money involved!The worst part of all is, that Google is about to kill the Internet. Content farms are churning out extraordinary amounts of crap. My impression is there are more articles out there, than real people. And in order to weight an articles value, you need at least to read it once. Who should do that, and report about his user experience? The only solution is to identify content farms and remove them from the index.

    • Andreas,

      Isn't that what Facebook's Like buttons do? They give real people a chance to be inputs into a next-generation algorithm. Google knows Facebook Search will be coming soon.

      • Thanks for your reply”… is not only realized by Facebook but…” – yes. Didn't say anything else, and blekko has a “spam” button. :-)Read few weeks ago, Google was beaten by Facebook regarding page hits or traffic (do not recall exactly). Now it makes sense, people have been more and more using the search functionality, rather than the social component ;-)But joke aside, what hurts most, is the fact, me as a small blogger can produce as much quality as I like, it's the sheer mass of articles churned out everyday, that keeps me almost invisible to the public. And either I don't have a devision of SEO experts who can pimp everything I write. And I don't produce stuff only because “Google Suggest” told me to.Regards,Andreas

  14. Pingback: The Unhealthy Dependency That Caused Demand Media To Lose Half Its Market Cap | Wordwide News Exposed

  15. we see google+ votes is one of the top social stuff but here is also many site like that gplusvotes.com now its time to see their activities and how much they will satisfy us with their performance. will come here to see your reply, thanks.

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  17. Pingback: Demand Media: Search Spam or the Future of Content? — GigaOM Research

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