Unprofitable Demand Media files for IPO

By Stacy Cowley, tech editor

NEW YORK (CNNMoney.com) -- Online content creator Demand Media, which spawns thousands of eHow articles and YouTube videos each day, filed Friday for an initial public offering of stock intended to raise up to $125 million.

The much-anticipated filing spotlights the business operations of one of the media world's most scrutinized startups. Founded in 2006, the Santa Monica, Calif., had revenue of $198 million in 2009, and in the first six months of 2010, its sales rose 25% compared to the same time last year.

But the company has never turned a profit. Demand Media lost $22 million last year, and in the first six months of this year, it posted a $6 million loss on sales of $114 million. As of June 30, the company had a remaining cash supply of $34 million. Venture capitalists have invested more than $350 million in Demand, which closed its last publicized funding round in 2008.

Demand Media's business model is to churn out vast amounts of low-cost content optimized to grab search-engine-driven clicks and advertising dollars. The company estimates that it adds 5,700 new items each day to its stockpile of 2 million articles and 200,000 videos. Most reach readers through a network of sites Demand owns -- including eHow, LiveStrong.com, Trails and GolfLink -- but some traditional media companies such as USAToday.com and the San Francisco Chronicle have licensed the content.

That approach has netted Demand an audience traffic tracker ComScore estimates at 86 million unique visitors each month, generating 550 million page views. An army of 10,000 freelancers churns out the constant stream of new material.

Demand is notorious for paying those freelancers low rates, typically $15 for an article of several hundred words or $30 for a video. But the company itself is still figuring out how to make their work more profitable than that: Using as its sample the pool of articles created for eHow from July - September 2008, Demand calculated that it has received a 58% rate of return over the nearly two years that batch of articles has been available online.

The company's revenue per 1,000 page views -- a common online sales metric -- varies widely, from an average of $11.81 on sites Demand owns to $3.39 on those its partners operate.

Demand cobbles most of its sales together pennies at a time from pay-per-click ads. Google is its most important ally: 26% of Demand's revenue so far this year came from ad arrangements with the search engine Goliath.

But Demand Media also has tentacles extending beyond its core content business, including an Internet registry business that is the world's second largest and manages 10 million domain names. Almost half of the company's revenue comes from that line of work. Demand has also experimented with selling online publishing and social media tools, such as its CoveritLive application for real-time blogging.

The company's top rivals are AOL's Seed.com and Associated Content, which Yahoo acquired in May for a price rumored to be around $90 million.

Taken together, these content engines and the Web's vast array of bloggers, tweeters, reporters, marketers and other creators are fueling an information explosion unprecedented in human history. Google CEO Eric Schmidt hauled out an eye-opening stat at the Techonomy conference this week in Lake Tahoe, Calif.: Every two days, we now create as much information as we did from the dawn of civilization up until 2003. To top of page

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