Demand Media Is Losing Its War with Google

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Demand Media has launched an online offensive to downplay news that a change to Google's search algorithm has significantly reduced traffic to its sites, including its flagship eHow. But that hasn't stopped the company's shares from taking a dive. Google finished implementing its latest tweak, known as Panda, last week. The update was meant to weed out from search results content produced by content farms, and on Saturday research firm Sistrix reported that eHow's Google ranking had taken a 66 percent hit.

The company acknowleged that its traffic had slipped, but said it expected to "generate year-over-year page view growth comparable to or greater than the year-over year page view growth reported for Q2 2010." It pointed out that it has a lot of sites that generate traffic (and therefore advertisement views), and said direct traffic was increasing, especially on eHow and Cracked.

But the numbers tell a different story, both in traffic and in the price of the company's stock. Quantcast's estimates show eHow traffic rising from 50 million monthly uniques in January (when the company went public) to 57 million in February, but beginning to drop off toward the end of February, right around the time Google implemented the first phase of its Panda update. Since the second phase went live on April 11, traffic has fallen 15 percent, according to Alexa. That dive was reflected in the share price, which fell below $17 this morning. Demand itself acknowledged in its S-1 SEC filing back in August the risk it faced by its dependence on Google. Under "Risk Factors" it included "the possibility that our relationship with Google from which a significant portion of our revenue is generated may be terminated or renewed on less favorable terms." It also singled out eHow as the site on whose success the Content and Media service depended.

Demand's Larry Fitzgibbon obviously did not mention if or how the company would overcome the latest chair thrown in front of it by Google's engineers, focusing instead on touting Demand's editorial products. But for a company that makes most of its money by selling ads against it's awesome Google ranking, there's no doubt it will try another volley.

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