A few weeks back Demand Media announced it was going public. The company, which has received over $350m in Venture Capital has been hotly tipped to IPO in the past 18 months, is rumoured to be looking at a valuation of around $1.5b which would make it more valuable than the New York Times company.
A few things present themselves when looking closely at the IPO registration (http://www.sec.gov/Archives/edgar/data/1365038/000104746910007151/a2199583zs-1.htm). The first is that, despite claims that it was, Demand Media is not profitable. It lost $22m in calender year 2009 on revenues of $198m and lost $6m on revenues of $108m for the first half of calender 2010.
Aiming at a $1.5b IPO on a loss making concern is ambitious. Having negative EBITDA makes applying any sort of multiple impossible … which makes a true value difficult to obtain.
Demand for the past 18 months has clearly stated to the market it was a lean, profitable enterprise. Albeit a private one. Richard Rosenblatt, who has seen a nice exit when he was part of the group that sold Myspace to News, even stated “A business mission is sustainable only when you are profitable. Making money allows us to attract the best employees, content creators and investors–and grow the business to match our vision.”
What Demand is doing is avoiding EBITDA as a multiple base and applying a projected OIBDA (http://www.investopedia.com/terms/o/oibda.asp). Using OIBDA Demand appears profitable and looking at OIBDA for the first 6 months of 2010 it appears Demand is on track to do just over $50m OIBDA for the full year 2010. Using those numbers Demand needs a 29-30x multiple to hit $1.5b
Peter Kafka of All Things D suggests that Demand may project OIBDA of $100m for CY2011 … which means based on that it’s only a 15x multiple to get to $1.5b. To put these multiples in perspective let’s look at these prominent tech and media companies
Apple – 18.65x
Google – 21x
Yahoo – 22.6x
MSFT – 11.64x
Fairfax – 31x
News – 15x
A 29x multiple for a company with 2 revenue streams (domains and media) is unlikely … however a 15x multiple makes more sense.
The real question is around whether the market is willing to bet on Demand given its extreme reliance on Google.
Now most web businesses have a reliance on Google – some more extreme than others – but not many as extreme as Demand. TechCrunch’s Erick Schonfeld found these interesting stats (link – http://techcrunch.com/2010/08/06/demand-media-ipo/)
- 45 percent of revenues are from advertising
- 26 percent of revenues came from Google ads
- 21 percent of revenues come from eHow
- 60 percent of eHow’s page views come from Google searches
The concern here is the reliance on Google for traffic and advertising.
Now, the nature of Demand’s business is basically creating content around what people are already looking for.
Rosenblatt again. “While more traditional media companies focus on supplying experiences they believe consumers might like, we’re unapologetically dedicated to delivering the ones they already demand.”
Demand creates content around everyday type things like how to remove a red wine stain, or what foods are good for gout, or how to make a tasty enchilada. A lot of their traffic comes from eHow – which is similar to about.com and basically a collection of ‘how to’ type things. One that I found today that is relevant for me is how to make my dog sit.
It’s not going to win awards but as a business it’s interesting. First thing is the return on investment for Demand per article is decent … the articles have much longer lives than traditional ‘news/topical’ content which has maybe 2-3 days to yield a return. A $30 investment into an article around ‘How to mix your own Gatorade’ could find traffic for years if not decades.
So, a $30 investment could yield 50,000 pageviews over 5 years. With 3 ads a page this is 150,000 ad impressions. At an effective CPM around $10 that $30 article investment could potentially yield $1,500 in revenue.
Whilst that doesn’t sound like much, if Demand has 100’s of 1000’s of these types of articles, all generating similar pageviews (or more) and can crack a model that allows for relatively self serving contextual ad placement, the business starts to look appealing.
Compare this to ‘traditional’ content which can cost five times as much to produce, and may generate 1-5,000 pageviews over a week. If an article costs $200 to produce it will most likely need to generate 10,000-20,000 pageviews to break even (less if the site it appears on is at high sell through, more if sell through is under 50%)
The other approach is employing ‘editors’ who churn out 15/25/35 articles a week in house. Using this model articles cost more like $40 in terms of salary cost so need to generate 1,000 views to break. Even though that figure seems low, many publishers – especially niche ones – would kill for their stories to do 1,000 reads. Many local content plays (ie businesses with salaries, sales teams and rent to pay etc) are seeing 1-200 reads of an article on average. I find on this blog a good piece will generate 500 views. Every fortnight or so something will crack 1,000.
Demand is clearly a less expensive content business that what the media world is used to. There aren’t a load of full time salaries, payroll tax, super, desk space, IT infrastructure etc for them to cover … they use a wide range of freelancers which means costs can be managed easily. This has led to them copping some grief from some elements of the journalism community who believe Demand Media is the enemy of great content.
Thing is, Demand isn’t setting out to directly harm the current model of journalism and how it’s funded. My feeling is Demand thinks the two can co-exist – and in a perfect world, they probably could.
But the world isn’t perfect and I think what Demand is doing – and what a successful IPO could really do – is make people question whether investment in real journalism in an increasingly digital world is a particularly good investment given the difficulties in translating large user numbers, pageviews etc into revenue and positive EBITDA.
If Demand can convince the market it has a profitable business on the horizon and the IPO reflects this – it will force investors to look closer at what models are worth banking on in the next 2 to 3 years. If older style content models are struggling 15 years into the Internet, but a new concept based on search demand data can make it, why would a potential investor become another player in a game full of losers when there’s another game with potentially a better upside and a leaner cost structure.
Seems as time goes on any business based around super low cost content, transactions, aggregation (straight aggregation like a Facebook or YouTube) or curation is starting to look appealing – rightly or wrongly.
So what does this mean? Will we see truly great media brands being created? Is there potential for another Time, Economist, National Geographic, Vanity Fair?
If Demand has the potential to list at a valuation above the New York Times – probably the most respected news brand in the world – maybe not.