Rise of the Machines: Why Demand Media Is Worth More Than the New York Times
by Peter Kafka
Posted on October 20, 2009 at 3:00 AM PT
The New York Times’s model for content creation, which revolves around well-paid professionals who rely on their experience and judgment, looks increasingly threatened. What does a new model look like? Perhaps one where a computer spits out assignments to day laborers who work furiously for low pay.
That’s the worrisome conclusion you can draw from Dan Roth’s excellent profile of Demand Media in the new issue of Wired. The piece is well-worth reading, but here’s the very short version: Demand has figured out how to generate a massive stream of low-cost stories designed to extract the maximum dollars from Google’s (GOOG) advertisers.
The company has plenty of competitors that do similar stuff–Associated Content, Mahalo, and About.com, owned by the New York Times (NYT)–but Demand’s secret sauce is an algorithm that helps it figure out the most valuable stories to assign, based on search terms and keyword prices. Which leads to stories like “Where can I donate a car in Dallas?”
Demand currently produces about 4,000 new stories a month, paying the freelancers who create them between $15 and $20 a piece. But CEO Richard Rosenblatt wants to up that to a million per year. At that point, Roth notes, “the payouts could easily hit $200 million a year, less than a third of what The New York Times shells out in wages and benefits to produce its roughly 5,000 articles a month.”
Which is why Demand is constantly floated as a potential acquisition candidate for the likes of Yahoo (YHOO), at price tags of $1.5 billion or more. Investors, who bid up Times stock a bit after the company announced plans to cut its newsroom headcount by eight percent, currently value the publisher at $1.3 billion.
All of that make you queasy? Then you’re going to hate reading paragraphs like this:
Here is the thing that Rosenblatt has since discovered: Online content is not worth very much. This may be a truism, but Rosenblatt has the hard, mathematical proof. It’s right there in black and white, in the Demand Media database–the lifetime value of every story, algorithmically derived, and very, very small. Most media companies are trying hard to increase those numbers, to boost the value of their online content until it matches the amount of money it costs to produce. But Rosenblatt thinks they have it exactly backward. Instead of trying to raise the market value of online content to match the cost of producing it–perhaps an impossible proposition–the secret is to cut costs until they match the market value.
I think there’s an equally worrisome story–worrisome, that is, from the admittedly self-interested perspective of content creators like me–about the pressure from advertisers, armed with their own technology, to push the value of online content down even further. But we’ll save that for later. One downer a day is plenty.
Want to know what the face of new media looks like? Here’s a 2008 interview Kara Swisher conducted with the preternaturally peppy Rosenblatt:
Comments
Hey pete,
Thanks for the morning cheer! I would be surprised if much of demand’s writers even get $15 to $20. They own hundreds of sploggy parked domains and exploit freely generated ticky-tack user howtos like the best of them. interesting to see you think Demand would be worth $1.5 billion. Two years ago when we wrote about Rosenblatt
http://www.forbes.com/2007/09/.....artner=msn
he had raised the last $100 million of his $320 million in VC money at a $1 billion valuation. Not such a huge bump up.
Posted by bruce upbin at October 20th, 2009 at 5:04 amDemand Media determines the overall value of online content based on its own (low value) content? If so, that sounds like circular logic.
Posted by Phoebe Spanier at October 20th, 2009 at 5:29 amPeter,
Nice article. I understand Bruce’s response above, but imho it’s reactionary and though in the moment may have merit, it is based on too narrow a vision.
The latter ‘vision’ being the operative word…Richard has seen that traditional media isn’t necessarily broken, it is just going through a Star Trek style transporter and is still all in pieces mid journey. His model is based on the notion that all the pieces will still come back together on content and we are gradually seeing the evidence of that materialise.
DM have placed themselves at the forefront of that whilst all eyes are still on pure user-generated models and cheap self-serve advertising. DM are the biggest single contributor of content to You Tube for example.
If FB holds a valuation of 6.5bn which has evidently decreased from more than twice than that, then in a recession, my bets are on a more modest but tangible valuation slowly going upwards. DM’s assets may be of varying IP value, but they are genuinely all owned and paid for. The big social networks, only ‘own’ the inconvenience of their users migrating away, not the content itself.
I hope Richard hold’s on to his baby for a few years so his vision is truly born out. Personally I’d invest in whatever he does now or next!
Jan
Posted by Jan Simmonds at October 20th, 2009 at 5:38 amoy. I almost puked when I read that article last night. the reaction of a good friend (editor in chief of a national mag) who also read it last night? “you might as well just slit your wrists.”
vision? yeah, great vision. fill the net up with more crap. that’s what we need.
for a somewhat different take on that, check out the following:
http://www.infoworld.com/d/adv.....orithm-900
cheers,
dt
Posted by dan tynan at October 21st, 2009 at 11:24 aman addendum: my exclusive interview with Demand Media’s director of content creation (Dr. Albert Gorithm) is here:
http://www.esarcasm.com/6724/s.....-by-a-bot/
cheers,
dt
Posted by dan tynan at October 22nd, 2009 at 6:51 am