Investors Overvalue Demand Media in Initial Public Offering

More

After pricing its shares at $17 last night, Demand Media went public this morning with an initial public offering. After only a few hours on the market, Demand Media, Inc. (DMD) was trading at $25 a share -- it's since fallen to the $23 per share range, but that is still considerably higher than was anticipated. With 8.9 million shares available, trading in that range puts the company's market cap near $2 billion, more than that of the New York Times and in the same general ballpark as IAC and AOL, two big (and established) players in the digital space. That's as crazy as it sounds.

There's one thing that Demand Media hasn't been able to do: Turn a profit.

The mad scramble to pick up some of Demand's shares doesn't mean that the company is putting out quality content, as Jeff Bercovici noted this afternoon in a post on his Forbes blog. "This is as good a time as any to point out that much of the content Demand churns out is still profoundly, absurdly stupid," he wrote. And that's not a stretch. Bercovici selected a few articles that Demand has produced recently -- "How to Pick Blueberries in Iowa," "Ideas for Organizing Scrunchies," "How to Unscrew the iTouchless Pepper Mill," among others -- that seem like they were cherry picked to make a point. And they may have been. But if they were, Bercovici put too much time into this piece because this is the kind of content that Demand is producing on a daily basis.

In the four and a half years since it was founded in May 2006, Demand Media's freelancers have produced more than three million articles and 200,000 videos, according to the Motley Fool. Using search query data, a sophisticated Demand algorithm spits out article ideas that it believes have high advertising potential. That's why all of the stories that come out of the Demand content farm, as it's been called in the past, are incredibly specific. Most of that content ends up on a handful of sites that Demand operates, including eHow, Cracked.com, and Trails.com. Famously, USA Today also runs thousands of pieces from Demand on the travel section of its website.

Over the years, Demand has been the subject of profiles in major magazines and newspapers, generated a lot of press -- both good and bad -- because of its ability to produce cheap content, and even found a home in some mainstream news organizations. (In addition to running travel articles on USA Today, Demand also supplies the Atlantic Journal Constitution with a weekly article.) But there's one thing it hasn't been able to do: Turn a profit. Strangely, they're not even trying to hide that fact.

"We have had a net loss in every year since inception," the company wrote in its IPO prospectus, as Wired's Sam Gustin pointed out. "As of September 30, 2010, we had an accumulated deficit of approximately $53 million and we may incur net operating losses in the future."

Maybe, then, an IPO was the right move. Sell shares for more than they're worth, raise the market cap, and then unload the whole kit and caboodle on a major media company that feels like, without a content farm and an army of freelancers, they're missing out on the Next Big Thing. Associated Content, a similar venture, was purchased last year by Yahoo for $100 million, where it will probably languish and get chopped up into pieces like other Yahoo ventures. That's only a tiny fraction of what Demand is now valued at thanks to today's IPO, but it wasn't a bad payday for only a few years of work.

Jump to comments
Presented by

Nicholas Jackson is a former associate editor at The Atlantic.

Get Today's Top Stories in Your Inbox (preview)

Is Technology Making Us Better Storytellers?

How have stories changed in the age of social media? The minds behind House of Cards, This American Life, and The Moth discuss.


Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

Is Technology Making Us Better Storytellers?

The minds behind House of Cards and The Moth weigh in.

Video

A Short Film That Skewers Hollywood

A studio executive concocts an animated blockbuster. Who cares about the story?

Video

In Online Dating, Everyone's a Little Bit Racist

The co-founder of OKCupid shares findings from his analysis of millions of users' data.

Video

What Is a Sandwich?

We're overthinking sandwiches, so you don't have to.

Video

Let's Talk About Not Smoking

Why does smoking maintain its allure? James Hamblin seeks the wisdom of a cool person.

Writers

Up
Down

More in Technology

Just In