Take note, Twitter: Not every tech company has a happy ending after a ballyhooed IPO.
Just look at Demand Media, the Santa Monica, Calif.-based firm some thought would revolutionize content production. Not long after the company went public in January 2011, its market capitalization soared to more than $2 billion, sending the then-5-year-old firm's value briefly past that of the New York Times Co.
The chief exec's role will be tough to fill given how steeply Demand has declined over its seven-year run. Changes in Google's search algorithms have twice hammered the young company in recent years, leaving its few brands that managed to get significant marketplace traction, including eHow.com and Livestrong, hemorrhaging traffic.
Now Demand's focus is on spinning off the only healthy component of its business -- domain registration -- while trying to motivate its content brands' rapidly eroding audience to spend money on its growing collection of unproven e-commerce ventures. Having quietly sustained several rounds of layoffs this year, the media side of the business is almost certain to be sold or taken private after the split.
The freefall of Demand serves as a cautionary tale for hype in the Internet age: No company burns so hot that it can't cool off.
But Joanne Bradford, newly named head of partnerships at Pinterest, who left her post as chief revenue officer at Demand in May, believes the company's struggles are symptomatic of those at many Internet content companies. "There's a big challenge for all content creators to overcome," she said. "I think Demand has done a very smart, focused job and now needs to figure out how to take it to the next level."
In early 2006, Rosenblatt and Shawn Colo, a principal with private-equity firm Spectrum Equity Investors, birthed the idea for a new kind of startup, which came to be known pejoratively as a "content farm." The operation created articles and videos quickly and cheaply, based on analysis of the most popular Internet search queries.
Rosenblatt was fresh off selling Intermix Media, owner of MySpace, to News Corp. less than a year earlier for $580 million, earning $23 million from the deal.
The idea with Demand was to marry two businesses: domain name registration and low-cost content production. The foundations were the acquisitions of eHow.com, a provider of how-to tutorials, and eNom, a domain-name registration service provider.
Early on, Demand used eNom's 1 million generic domain names (such as "3d-blurayplayers-com") to serve up relevant ads to people searching for specific topics. These "domain parking" pages were immensely profitable, generating north of $100,000 per day, according to a former Demand exec who requested anonymity. "That's $35 million-$40 million per year without doing any work," the exec said.
But the tactic was fundamentally a bait-and-switch. Users landed on the pages expecting to find information on a subject and instead found an ad. To try to drive up traffic, Demand shifted its strategy, populating the sites with thematically related content. Counterintuitively, though, that decreased ad click-through, since people were reading the articles instead of the ads, according to the former executive.
Demand then continued to build out the content-farm strategy, treating the domain-name registration business as largely separate from the content-production arm. Paying contributors comparatively little -- usually less than $20 for a single article or video -- it built up a stockpile of content against which it sold targeted advertising.
That content ranges from "How to Tell Who Has Unfollowed You in Twitter" to "How to Pick Blueberries" (tip: "Tie a bucket to your waist") on the company's biggest website, eHow.
When it started, the concept certainly looked like it could scale and pick up massive traffic -- and it did. In November 2010, Demand's owned-and-operated websites represented the 17th-largest Web property in the U.S., with 105 million unique visitors who viewed 679 million pages that month.
As a private firm, Demand had raised a staggering $355 million in funding over two years from investors including Goldman Sachs, Oak Investment Partners, 3i Group and Spectrum Equity Investors. It mostly used the funds to acquire companies that would further the reach of its content network and domain name businesses. At the close of 2012, Demand reported owning 171 subsidiary companies. Whether it was ever profitable is still subject to debate, but the acquisitions fueled its valuation, which in turn attracted more funding even as actual growth seemed ephemeral.
The company filed to go public in August 2010, betting that investor excitement over its algorithmic approach would make it one of the Internet's biggest media firms. Skeptics wondered whether Demand could really keep the content-farm engine humming over the long haul. But some industry analysts were bullish, predicting the model would be hugely disruptive in the media landscape.
"Demand is truly onto something big," Wedbush Securities analyst Lou Kerner wrote in a November 2010 blog post. "We love the media side of the business as it marches its way to significant free cash flow generation."
On Jan. 26, 2011, Demand went public. Shares closed up 33% on the first day of trading to yield a market cap of around $1.5 billion.
Epic Fail: The Rise and Fall of Demand Media
We've upgraded our reader commenting system. Learn more about the new features.
The Baltimore Sun encourages civil dialogue related to our stories; you must register and log-in to our site in order to participate. We reserve the right to remove any user and to delete comments that violate our Terms of Service. By commenting, you agree to these terms. Please flag inappropriate comments.