Demand Studios’ IPO Reveals More Reasons Writers Should be Wary

Content Mills and Substantial Pay Don't MixIn case you haven’t yet heard, content farm Demand Studios is planning a $125 million initial public offering. This was not unexpected. We’ve already got the drill down — content mills pay freelance writers peanuts, and then go public or get acquired for $100 million-plus.

But there’s a difference here from Associated Content’s recent acquisition by Yahoo! An IPO requires a hefty public filing, in which the company has to disclose tons of facts about their business. (Since Yahoo is so big and AC so relatively small, Yahoo didn’t have to disclose much about the acquisition to its shareholders.) The IPO filing, known as an S-1, is long. But here in brief are a few important things the filing reveals about Demand Studios’ business that writers should know:

DS is losing money. That’s right, they pay you only $15 for an article, and they still haven’t figured out how to make a profit off you! Can you believe it? They’ve got 10,000 writers creating 5,700 pieces of content a day, but that apparently isn’t enough critical mass to make a profitable business model.

If I were staking my income on what DS does, I’d be seriously worried about that. Unprofitable companies eventually go bust, for the most part. Essentially, DS needs the IPO money to stay afloat! After all their executive talk about how they’re the new media model that’s going to flatten traditional media. Yeah, we’ll see about that. A lot of print publications are still making money, you know.

DS’s markup is 260 percent. DS pays you $15, and the filing reveals they make an average of $54 per article. Yet, they are still hemorrhaging cash. The company lost $14.2 million on $170 million of revenue in 2008; in 2009, it was a $22 million loss on nearly $200 million in income. They seem to have improved a bit in the first half this year, only losing $6 million on $114 million. Wow, I bet if you put content up on your own site and sold ads against it, you could figure out how to make a profit…and you could keep all the profit for yourself!

I’d love to know, with what DS pays editors, where the fat is in this business model that’s making it unprofitable. It’s kind of stunning that they’re trying an IPO with this profitability record, but surprisingly, about 40 percent of companies trying the public markets right now aren’t in the black. Sort of a weird return to the dot-com days going on.

DS is in danger of being branded spam by Google. They disclose this in the section on the possible competitive threats to their business. Hmm, if that happens and Google decides to screen DS out, poof! No more Demand! A lot of Internet-watchers believe at some point Google has to find a way to screen out these sites or users are going to turn to other search engines in their search for better-quality content.

DS makes much of its money from domain-selling and domain-squatting. Turns out more than 40 percent of its revenue is from eNom, not even from the content mill. People buy domain names from eNom, and eNom runs Google ads on empty Web sites to get revenue. Weird, huh?

DS’s timing shows it’s desperate. The IPO market has perked up a bit this year from its dead stop last year, but most IPOs aren’t doing very well. The majority have gone down after issue, which is bad news for company founders and backers. The down market means only companies that HAVE to get some money right now are trying an IPO. DS could no doubt get more money if they waited a year or two. But apparently they can’t wait.

The upside here — founders and investors may not end up with much. They have to wait three months after the IPO before they can cash any of their shares, and the way the market’s been going, they may not do very well.

As many people know, I have never written for DS or any of their ilk. But I still think it’ll be pretty sweet if we can watch the folks who perpetrate this crime against fair wages get hosed on their big IPO payday.

The other thing to know is just because a company’s filed an IPO doesn’t mean it’ll go — they still have to get enough big investors interested to price it and make it go. We’ll see, given its unprofitability, if DS can sell investors on the deal.

Ready to move up from content mills? Learn how to grow your writing income in my new community, Freelance Writers Den — get your questions answered by freelance-writing pros, take e-courses, attend live events, and much more.

Photo via Flickr user Tjeerd

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