For anyone who hasn’t been following along, Demand Media — owner of popular content mill Demand Studios — finally went public last week and netted about $77 million, after many months of seeking buy-in from investors. The company’s business model raised quite a few eyebrows, especially its lack of profit despite many public claims to the contrary, heavy reliance on Google to drive traffic to its sites, and dubious accounting method in which they amortize your measly $15 writer fee across five years.
But the deed is done now, and Demand is a publicly traded company, at a valuation that for a brief moment there was, surreally, greater than that of the New York Times.
What does Demand’s IPO mean for freelance writers? Let’s put it this way: I’m not buying their stock. And if I were writing for Demand, I’d be planning my exit strategy.
Harsh scrutiny hits Demand
I wanted to wait a week and see what happened with their stock price before I wrote about Demand again, to watch investors’ reactions. So here’s what it did: After a brief bump up — it priced at $17 a share, above its planned range — Demand stock has gone nowhere but down, as you can see in the chart at right.
Why is that happening? Skepticism has already set in within the investment community. For instance, at the influential investor blog Seeking Alpha, Kevin Berk suggested the company’s true value is more like $10 a share and strongly recommended investors sell it. Popular personal-investing site The Motley Fool named Demand “the market’s best short opportunity” — meaning investors could profit by purchasing options that essentially bet the stock’s value will decline.
It probably didn’t help that nearly the moment Demand went public, Google announced changes to its algorithm to crack down on spammy, plagiarizing sites. Demand said that wouldn’t affect it…until oops! It acknowledged maybe its sites do have a plagiarizing problem. And now they’re going to work on fixing that. Really. More Google changes are expected, and they could drastically affect Demand’s ability to draw viewers to their sites.
I think going public isn’t going to work out well for Demand, or for its writers.
As some observers have pointed out, Demand flourished in part because a lot of people were out of work and desperate, willing to work for a few quick bucks. Now, the economy is recovering, and soon the unemployment rate will likely begin to decline. It’s unclear how Demand will continue growing and get big enough to become profitable under this scenario. It’s a bit of a mystery why it’s not profitable already, given what they pay writers and editors versus what Demand makes, as I outlined in my earlier post on Demand’s IPO.
What it means for Demand writers
I think writers who depend on Demand for income should pay close attention to what’s happening here. Professional investors — people who analyze companies’ prospects for a living — are betting against Demand. They’re not seeing a profitable business model in here.
It’s worth noting that Demand’s IPO hasn’t paid off its debts. Far from it — it’s raised more than $300 million in venture capital. The IPO has bought it only modest breathing room. Translation: Don’t expect a rate raise. As Demand’s stock declines, the company’s value shrinks and its ability to borrow will shrink, too, limiting the company’s ability to spend for growth.
Now that it’s public, Demand will be under more pressure than ever to squeeze out costs. If anything, pay rates will likely only go down — that is, if Google doesn’t pull a shift that vaporizes Demand’s whole business model. Google is under its own pressure, from competitors such as Blekko, which is already filtering out junk-content sites such as Demand’s.
Demand Studios may soon find its new-media empire is built on sand that could shift or blow away. Here’s hoping Demand’s 17,000 freelancers are ready for the changes.
Chart via Yahoo! Finance
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