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Demand Media IPO stalls amid accounting questions

By Julianne Pepitone, staff reporter


NEW YORK (CNNMoney.com) -- Online content creator Demand Media filed for an IPO back in August, but the company is still answering regulators' questions about its unorthodox accounting practices.

Demand CEO Richard Rosenblatt has been insisting for years to media outlets, including Fortune, that his company -- which churns out vast amounts of low-cost content optimized to grab search-engine clicks -- is profitable.

But in its IPO filing, Demand disclosed that it was more than $6 million in the red for 2010 as of August. It posted a net loss of $22 million in 2009, a $14 million loss in 2008 and a nearly $6 million loss in 2007.

All Things D reported Thursday that regulators are taking a closer took at Demand's unusual accounting practices. Demand Media filed an amended Form S-1 to the Securities and Exchange Commission on Tuesday that shed more light on its accounting.

What the added information boils down to: Demand doesn't expense the cost of paying its writers upfront. Instead, it spreads those costs over five years, which boosts its bottom line.

Demand's rationale is that the writers' content will generate revenue for the company revenue for multiple years, so it shouldn't have to recognize the costs upfront. It estimates the "average useful life" -- meaning the amount of time it will make money -- of its content to be 5.4 years.

Traditionally, publishing companies expense their editorial costs immediately. Demand is instead treating them as a capital investment, like a new building or piece of equipment.

Demand's business model is based on creating a giant trove of content at rock-bottom rates, typically $15 for an article of several hundred words or $30 for a video. The company currently has 13,000 active freelancers and a stash of around 2 million articles and videos.

Demand then sells ads around that content. Most of the articles reach readers through a network of sites Demand owns -- including eHow and LiveStrong.com -- but some traditional media companies such as USAToday.com and the San Francisco Chronicle have licensed the content.

Demand also runs 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, including its CoveritLive application for real-time blogging. To top of page

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