It's been nearly a month since Demand filed its S1, and I promised you all a longer look after my initial posting. Here are some thoughts now that I've had a chance to digest the document. A caveat: I know Demand CEO Richard Rosenblatt well, and consider him a friend. And one of his investors, Oak, is an investor in my company, Federated Media. However, neither Oak nor Richard participated in the preparation of this post.
First off, the offering is notable for the number of banks that grace its cover sheet. I count ten, as many as Google had in its IPO back in 2004. That shows the hunger in the financial world for a win - and the company that gets in front of that hunger has a better chance than most to succeed in an offering, as those banks will all be pushing shares to their best clients.
But Demand's S1 is far more traditional than Google's. There's no auction involved, and the company stays far away from the revolutionary prose espoused in Google's S1 (remember "Google is not a conventional company. We do not intend to become one" ? And recall my response: "Yow," I said to myself (and now to you...). "Do they really want to set themselves up like this?")
One can debate whether Google has managed to live up to its S1, six years later, but it's clear that Demand isn't planning on setting itself up in a similar way. The two lead bankers are stalwarts Goldman and Morgan Stanley, and it looks like Demand is going to play this one straight down the middle.
I find Demand's IPO interesting for several reasons, but the one that really gets me thinking is the company's positioning - a new form of media company that leverages technology, algorithms, and scale. It reminds me of Yahoo - which picked up Demand-like Associated Content recently.
Yahoo is currently running an industry campaign titled "Science, Art, and Scale" - arguing that it takes all three to make a great media company. When it comes to Demand, one might argue there's a distinct lack of "Art," but young companies always play to their initial strengths. Regardless of whether you believe Demand is the next big thing or a "content farm," anyone who is paying attention to the world of Internet media should take the time to get smart on Demand's model. Win or lose, there's much to learn in how the market judges this offering.
In fact, I believe this IPO could well be a tipping point of sorts, a referendum on not just the financial markets, but on the Era of Google as we know it. More on that in a minute.
The Offering
Demand checks the box as a typical Internet media company - it's got large reach and scale with owned and operated properties like eHow and Livestrong.com, and it's got a freshly minted syndication business for its largely service-driven content base. But having large numbers (86 million uniques, in the case of Demand) isn't enough to get a company public these days (ten years ago was a different story).
Investors now want a company to show them how its can turn those uniques into dollars, ideally via multiple product lines. And Demand has a pretty impressive history of doing just that - not without controversy, to be certain, but still, the scale is impressive.
Demand declares its mission thusly: "To fulfill the world's demand for commercially valuable content." As has been outlined well by others, Demand's core product, at least as far as it is encountered by a consumer, is the daily creation of thousands of text and video articles on mostly service-related topics: How To Choose a Watermelon, for example, or How to Tie A Tie. Demand has also begun to create and aggregate content against celebrity brands in classic media categories - Lance Armstrong in health, or Tyra Banks in women's interest.
Demand also is one of the world's largest registrars, where it actively plays the domain game, leveraging "type in traffic" against AdSense for Domains and Yahoo's competing product, as well as testing that traffic against its own content (which in itself is monetized through both AdSense and site specific brand campaigns). The domain business is extremely lucrative, in that it offers both subscription and advertising revenue, and operating costs are low. As Demand puts it in the S1: "Our Registrar complements our Content & Media service offering by providing us with a recurring base of subscription revenue, a valuable source of data regarding Internet users' online interests, expanded third-party distribution opportunities and proprietary access to commercially valuable domain names that we selectively add to our owned and operated websites."
I'm not going to wade into the debate over "content farms" here, mainly because I honestly find it a distraction. Demand has clearly found a strong and scaleable place in the search and content ecosystem. If journalists and publishers find it the model insulting, I suggest they create a better one. Demand's content studio isn't ever going to win a Pulitzer, nor, frankly, should it be asked to. But it works for me when I want to tie a tie. And that, times millions of uniques a day, is a real business.
The Financials
As most coverage has pointed out at length, Demand is not making money, at least not on a GAAP accounting basis, which of course is what matters at the bottom line. But the company is quick to point out that it is, in fact, making money on an "adjusted OIBIDA" basis, and a lot of it. From the S1:
"For the year ended December 31, 2009 and the six months ended June 30, 2010, we reported revenue of $198 million and $114 million, respectively. For these same periods, we reported net losses of $22 million and $6 million, respectively, operating loss of $18 million and $4 million, respectively, and adjusted operating income before depreciation and amortization, or Adjusted OIBDA, of $37 million and $26 million, respectively. See "Summary Consolidated Financial Information and Other Data—Non-GAAP Financial Measures" for a reconciliation of Adjusted OIBDA to the closest comparable measures calculated in accordance with GAAP."
On page 12 of the filing, the company gets into this measure, and it'll be by this measure that the company hopes to be judged in financial circles. Sorry to give you more financial jargon, but it's important:
"Our non-GAAP Adjusted OIBDA financial measure differs from GAAP in that it excludes certain expenses such as depreciation, amortization, stock-based compensation, and certain non-cash purchase accounting adjustments, as well as the financial impact of gains or losses on certain asset sales or dispositions. Our non-GAAP revenue less TAC financial measure differs from GAAP as it reflects our consolidated revenues net of our traffic acquisition costs. Adjusted OIBDA, or its equivalent, and revenue less TAC are frequently used by security analysts, investors and others as a common financial measure of operating performance."
In short, it's the OIBDA that's got ten banks eager to take this company public. As far as I can tell, the OIBDA measure is intended to showcase Demand's content business (as opposed to the registrar revenue), as the content business is growing far faster, overtaking registrar revenue 58% to 42% this year. By the measure of content OIBDA, the company is minting money, nearly $26 million in the first six months of this year.
However, Demand chose to take all that operating profit, plus some, and reinvest it (mostly) in acquisitions (to the tune of $21mm). And GAAP rules meant the rest of the operating profit was eaten up by non cash items like content amortization, stock option expenses, and depreciation.
In other words, the company could have been GAAP profitable, but - and this is important - it chose not to be. That's interesting. We'll see if the market agrees with this strategy.
Regardless, the company has significant revenue, and that revenue is ramping. $114 million in the first half of 2010 is impressive, and that's before Q4, which for most media companies comprises 40% or more of annual revenue. That puts Demand on track to clear more than a quarter of a billion in revenue this year.
The Google Referendum and the Social Connection
OK, moving on from financials, the next key factor in the Demand offering is how, in a very real sense, it's a referendum on Google's current and future business prospects. Google is far and away the largest referrer of traffic to Demand properties, and its largest revenue source as well (this includes revenue from YouTube via eHow and other videos). The S1 acknowledges this, declaring that the company receives 26% of its revenue from Google, but it does not explicitly say what percentage of traffic it receives from Big G. Suffice it to say, it's got to be huge. (Danny has an estimate here - it's in the mid thirty percent range).
So the big question is this: If Demand is, in essence, a company that leverages Google as a platform (like Zynga does Facebook, for example), how will the stock market handicap Demand's - and therefore Google's - future?
It's a worthy question. Google as an investment hasn't done so well lately, in particular compared to rival Apple. Another rival, Facebook, is most likely going to be the hottest IPO after Demand (or Skype). So from Google's standpoint, Demand is an important event, and I'm going to guess Google executives are rooting for it to be a raging success.
To me, all of this turns not on whether Demand will continue to be a search and content success (it will, to my mind), but whether Demand's content can in some way become essential in what is increasingly a social content ecosystem. Of course, that is a key question for Google as well - can it add a third dimension of social to its flat content-based model of search?
Put another way, Google owns the web of directed intent - help me find WHAT I need, WHEN I need it. Content like Demand works beautifully in this world, and up till now, the web has been modeled on the search centered world of WHAT. But the web is moving to a web of indirect intent - modeled more on how people communicate with each other, as opposed to how people find answers. That's a WHO-driven web, a social web - a Facebook web. And the WHAT web, led by Google, hasn't cracked that nut. The reason? Well, in short, people are not predictable. That's the charley horse of social. We love to share, but writing algorithms that predict sharing is a tricky business.
Criticisms of Demand's content declare, rightfully, that "flat" articles about how best to tie a tie or potty train a pet are not the kind of articles that most people want to share. They serve a single purpose: they are consumed and folks move on. It's a classic search model.
Branded content, however, is far more social, because branded content is written with a human voice and published by a branded entity. Search drives a lot of traffic to branded content, of course, but once there, people tend to share branded content a lot more than "how to tie a tie." The former is socially shareable ("hey, check this out, it's interesting") and the latter is specific ("I need an answer, and I don't think my friends have the same need right now").
This was ever so. Voice and point of view are the distinction here. Encyclopedias and Yellow Pages don't have it, Mashable and the Huffington Post do. People are far more likely to point a friend to a link on HuffPo than a link on eHow.
So whatever Demand's social strategy is will say a lot about how the company, and by extension Google, might compete in the next few years.
Unfortunately, the S1 doesn't give us much to go on when it comes to this topic. Demand does, through its purchase of Pluck, provide "enterprise-class social media tools allow websites to add feature-rich applications, such as user profiles, comments, forums, reviews, blogs, photo and video sharing, media galleries, groups and messaging offered through our social media application product suite."
But Demand does not disclose how much revenue it receives from this offering. I think one can safely assume it's not very large.
So how can Demand get more social? A few ways. First, it can build "up the pyramid" - create branded sites like Livestrong.com that draw scale from thousands of "how to" articles, then layer more social branded content on top. This is clearly an area the company is getting into, with its recently inked deal with Tyra Banks, for example.
Second, it can figure a way to makes its service content accessible through the new distribution channel of social. As I've said many times, social is challenging search as the navigation interface for consumer intent. To put it another way, many of us are just as likely to tweet or post on Facebook something like the following "Help! I forgot how to tie a tie!" as we are to search for that on Google. We then hope one of our pals will post a link to - well, perhaps to eHow's page on the subject.
What if there were a better way to surface those links as smart responses to such questions, through Facebook's own advertising platform, for example, or a new app that Demand might create on the Facebook Platform? That's one way to make service content more social - weave it into the fabric of social services at the root level. When I ask that question on Facebook about tying that tie, perhaps the response comes from a Demand content app.
But how does this help Google? I'm not sure, to be honest. At some point, the company will have to figure a way to play nicely with Facebook. Perhaps if Demand succeeds, both as a public company and in relationship to social, Google will see Demand as a point of entry to solving this problem. I'm not predicting this, as it'd be a stretch for Google to own a company that clearly competes with the rest of the content web - the same content web Google depends on for its value. Then again, Google did buy YouTube....
In Conclusion: The Role of Data
Perhaps the least discussed aspect of Demand's business, but one that clearly is critical to its long term success, is the amount of data the company has on how people search, what they do once they do search, and what they do once they engage with a piece of content. This includes how they share it, where they go next, and so on. The ability to see those patterns, make products against them, and ultimately profit form them is at the heart of Demand's model.
Given the size of Demand's content network, its sophistication in terms of leveraging search data, and its ambition to be a larger brand player, I can see the company starting businesses in the data services field - should it decide to. Or it might, as Google does, keep that data for itself, and leverage it to its own end. Either way, I think it's worth noting that there's a hidden data gem in Demand's business, one that will be a major asset as it negotiates acquisitions, new product developments, and business deals with the major players of the Internet Economy.
Demand's bid for the public spotlight comes at a fascinating time for the world of content, navigation, and social media. It raises questions about the future models of search and social networks. Watch this one, and watch how leaders Google and Facebook respond to it.
Fortunately for us, Demand Media CEO Rosenblatt agreed to come speak at Web 2 prior to filing for the IPO. That means he can continue to be part of the event. You can register or request an invitation on the site here.
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