Demand Media Also Under Monetized

Of late, I have given quite some thought to an opportunity that multiple Internet-based companies have missed. Most of these companies, with high traffic and equally high valuations, have clearly missed out on one of the most powerful monetization models: affiliates, especially revenue sharing. These companies prefer sponsorship and CPM advertising to percent of revenues. Online media company, Digital Media is another such player.

Demand Media’s Financials
Santa Monica-based Demand Media (NYSE:DMD) was founded in 2006 by Richard Rosenblatt, former chairman of MySpace and equity investor Shawn Colo. Demand Media is a content farm that focuses on creating online content based on user demand, provides social media platforms and also owns eNom, the world’s second-largest domain registrar.

Demand Media publishes content not only on portals such as YouTube but also on their own branded properties. They own eHow.com, an online learning site; LIVESTRONG.com, an online fitness tracker; Cracked.com, an online extension of the long-running American humor magazine Cracked; Trails.com, an online planning resource for self-guided outdoor and adventure travel in North America; GolfLink.com, a website dedicated to avid golfers that helps them track scores and improve their game; and typeF.com, a website focused on fashion and beauty content. Overall, their sites command more than 100 million unique visitors worldwide.

They earn revenues through content and media services and through registrar services. The content and media services segment creates customer specific content, leverages their online properties for targeted ads, helps businesses create online experiences through Pluck, a social media platform that drives traffic, turn visitors into fans, and helps make the Web more lucrative for over 375 leading brands and publishers.

For Q1, the company saw revenues of $76.3 million grow 50% over previous year’s $51.0 million. Non-GAAP EPS of $0.06 also improved over previous year’s $0.03. The market was expecting revenues of $69.5 million with EPS of $0.04. By segment, content and media revenues grew 77% over the year to $48.7 million and registrar revenues grew 18% over the year to $27.7 million. The page views of content on their partner sites grew 42% to 3.8 billion.

Demand Media expect revenues of $70 million to $74 million in the current quarter with adjusted earnings of $18 million to $19.5 million. For the year, revenues are projected to be $305 million to $315 million with earnings of $82 million $86 million. The Street was projecting revenues for the current quarter at $72.8 million and full-year revenues at $309.6 million.

Demand Media Extends Social Media Platform Offering
Last quarter, they bought live blogging tool, CoveritLive, in which they already had a minority stake. CoveritLive lets viewers of live events engage real time through letting them share content including videos and images, participate in real time polls and Q&A sessions for live events. Some of its clients include Disney’s ESPN, the BBC, and Sky News. Through the acquisition, Demand Media will be able to bolster their Pluck service as they believe the two services complement each other.

Demand Media’s Quality of Content
Earlier this year, the company received a great deal of flak for its poor-quality content and was labeled a content farm. The recent change in Google’s algorithm, known as Google Panda, which gave merit to higher-quality content by ranking it higher, has impacted Demand Media’s viewership. According to Hitwise data, following the change in Google’s algorithm there was a 29% reduction in referrals from Google to eHow and an overall 40% reduction in Google referrals to all of Demand Media’s sites.

But, things have improved since. Demand Media improved pay policies for qualified freelancers to increase feature type stories, pulled out user-generated content on its own sites and added tools to let readers suggest improvements. To further improve quality, they tied up with various experts. For instance, they partnered with Food Network star Rachael Ra, for the eHow Food channel and with Tyra Banks to launch the typeF.com site. The company claims to be witnessing improvements in their page views since these steps were taken.

The stock is trading at $14.17, taking the company’s market capitalization to $1.18 billion. The price is lower that its IPO issue price of $17.00 and is also significantly short of the high of $27.38 it touched in April of this year.

Now that Demand Media is focusing on higher-quality content, they should also be working on the affiliate concept and monetize their user base. As I said, if they don’t, they are leaving big money on the table. They should look at Groupon for inspiration. With 70 million users, Groupon has managed to deliver $644.7 million revenues in the first quarter alone. The company is expected to cross $3 billion revenues this year. Groupon’s potential is also being reflected in its valuation which analysts estimate has soared to $30 billion. In Groupon’s case, I believe the high valuations are reflective of their revenue-sharing monetization model which has proven to be more lucrative than CPM advertising, which is a suboptimal business model for large sites.

Other media sites like The Huffington Post and TechCrunch could also benefit from Groupon’s model. Earlier this year, AOL bought The Huffington Post for $315 million. The Huffington Post had 25 million unique monthly visitors and reported revenues of $31 million last year, and TechCrunch, with 9.2 million estimated visitors last year, was generating revenues of $10 million a year.