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.
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.