As technology-company IPOs keep coming to market, commentators will typically make reference to those that re-inaugurated the trend, such as Demand Media, LinkedIn, and Pandora. But they never seem to mention where these stocks trade today.
We’ve written about Demand Media’s business category, the world of content farms, here before. Google did Web searchers a big favor a couple of months ago, by modifying its search algorithm to bury garbage content (see Demand Media). DMD investors have little left to cheer about.
Looking at this from a business model leaves little to cheer about either. A gentleman named Matt Shanahan of Scout Analytics was cited in an excellent article here showing how the old “20/80” rule comes into play for news websites.
Shanahan’s analysis found that heavy readers of online content, what he termed “fans,” make up around 55% of a news site’s traffic (OK, not exactly 20/80, but you get the point). That is why The New York Times online paywall is working (as we predicted.)
And it is why Demand Media’s stock might continue its ride downward. It doesn’t generate “heavy readers” or “fans.” Just fly-by Web searchers (another Shanahan term). DMD’s advertising-based business model requires millions of “fly-bys.” And a million-plus-one the next day, and so on. Google has essentially throttled this type of business model for mediocre content.
Unless Demand Media has a rabbit to pull out of its hat, such as the rumored tie-up with Scripps Interactive, its post-IPO investors – especially those that jumped on in early April – better keep those lap belts tight.