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Summary:

Demand Media, a Los Angles-based company started by former Intermix/MySpace CEO Richard Rosenblatt has earned the scorn for its content factory approach. With $200 million in revenues and profits, Rosenblatt is laughing all the way to the bank. My notes from a conversation with Rosenblatt

If you’ve know who Richard Rosenblatt is, chances are you’ve already formed some strong opinions about the man — especially if you work in media. Thanks to his position as the founder and chief executive officer of Demand Media, a Los Angeles-based company that’s often labeled as content factory, he has become a divisive figure. Not a day passes when he is not criticized for paying writers infinitesimally small amounts of money.

However, when you meet Rosenblatt in person and listen to him with an open mind, the logic of his business quickly becomes clear. Much as Michael Dell made the just-in-time production of computers his forte, Rosenblatt has brought a mathematical rigor to the world of content. Demand-owned sites such as eHow get more than 100 million unique visitors a month — and the company is valued at over a billion dollars.

Demand got its start by buying little-known Internet properties. Rosenblatt, who in the past was the head of both Intermix Media and iMALL (which collectively fetched $1.4 billion when they were sold), was able to raise $320 million in funding from the likes of Goldman Sachs, 3i Group, Generation Partners, Oak Investment Partners and Spectrum Equity Investors. That big slug of cash has not only helped Demand grow and scale its business, but to build a proprietary back-end system that’s become its secret sauce.

How Demand Media Works

The system allows the company to calculate the average cost per click of a particular search query and multiply it by the likely traffic in order to figure out how many dollars it would bring in over a period of five years. That gross revenue is then divvied up amongst the people who work on the creation of a related piece of content, including those who write the copy, fact-check and copyedit it. Essentially, the data tells Demand what’s a good and valuable piece of content and what’s not. The revenue potential is an overriding factor when it comes to making content decisions.

Such a system, used in combination with a domain registration business its owns, means Demand Media is able to generate content based on what people are searching for on the web. So much so that others — such as the newly independent AOL — have started to imitate his business model.

This approach has come under heavy criticism. Michael Arrington recently wrote:

These models create a race to the bottom situation, where anyone who spends time and effort on their content is pushed out of business. We’re not there yet, but I see it coming. And just as old media is complaining about us, look for us to start complaining about the new jerks.

ReadWriteWeb’s Richard McManus was even more blunt:

I can’t help but think that the rapid rise of these two companies may be bad news for the Web. If a small number of companies come to dominate a content market, usually blandness and lowest common denominator fare follows. The network television and radio markets in almost any country in the world are evidence of that.

Last week, when interviewing him onstage at the Twiist-up conference in LA, I asked Rosenblatt about allegations that his company was flooding the Internet with unwanted content. He dismissed my question with a laugh, saying, “People actually want the information and we are providing it,” he said.

About 2.0

Demand Media, according to Rosenblatt, is not in the news business, but the information business. Think of it as the long-tail version of service journalism. “Did you know that every month 50,000 people search on ways to make detergent at home?” Rosenblatt said. “We create content to answer those [types of] questions.” Some 100,000 pieces of every month, in fact.

What Rosenblatt is doing isn’t anything new. About.com created a network of low-cost, human-curated/generated web sites in the late 1990s and grew to great heights before losing its way. One of the reasons why About.com lost its way (after being acquired by The New York Times) was because it never developed a way to bottle the search genie.

Yet the approach taken by About.com has only become more relevant as our world has become more complex. And rather than look to just our friends for answers to questions on everything from how to set up a TiVo to buying art to filing for bankruptcy, we ask Google, Facebook and Twitter. A lot of this information is not available via traditional media sources.

A Content Factory or Not?

Rosenblatt bristles at the idea that he’s running a content factory, noting the Demand works with over 5,000 writers –many of whom are old media reporters — and has about 650 copy editors. Such an arsenal is bigger, he claimed, than “the three biggest publishing companies,” adding that he was hiring at a time when big media companies have been laying off people.

Writers can make anywhere from $15 to $1,000 for a piece of content. While some have alleged that Demand pays its freelancers next to nothing, Rosenblatt said that the people who make very little money spend very little time creating that content.

Demand already has over 500 employees; it did sales of over $200 million last year and is profitable. And 2010 promises to be even better, thanks to the return of online advertising dollars. When I asked him if the company would go public in 2010, however, he dodged the question. But if the current growth rate of Demand continues, I wouldn’t be surprised to soon see it try to raise capital on the public markets.

Kill the Old News Business

In his opinion, the newspaper business as it stands today needs to die and the industry needs to re-invent itself as an Internet-centric one. “News that is 12-24 hours old just doesn’t make sense,” he said. “Consumers don’t want their content that way.” He dismissed The Los Angeles Times as “public service” and not “a business, because it cannot make money by doing what they are doing.” He thinks some billionaire should buy the paper and run it as a philanthropy. Ouch!

And what would he do with the LA Times, if given the chance? He was quick to answer: He would outsource most of the generic content creation to companies such as Demand Media, stop distributing the paper version of the publication and go all-digital. And he’d put in place an advertising strategy around content that people want. For instance, articles about hiking should attract an advertiser like REI. As for the truly important content — the news — he thinks that newspapers should focus all their resources on higher-end investigative journalism.

When I asked him what he thought of new devices such as the iPad and their impact on content, Rosenblatt said that “the iPad is symptomatic of what’s going on” because it shows that there are now even more new ways of consuming content. “Consumption on different devices is very exciting.”

Photo of Richard Rosenblatt by Jim Alden via Flickr.com/Techfrog

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  1. What the DM critics don’t often mention is, that the established media are also not that keen on paying. Yes, they do pay much more, but only to a limited number of writes. Who doesn’t break into, will get nothing. And they also do layoffs. So it’s all relative. DM pays less, but to more people.

  2. Free To Choose Friday, February 5, 2010

    I wish Google would give me a setting in its preferences to delist sites like Demand and Mahalo from the index for my searches. Problem solved.

  3. om – another very clear view into the mind of Richard Rosenblatt is the company manifesto which you can find at http://bit.ly/6r5xW8.

    thx.

  4. This company is two things: a money-losing sweatshop that they are hyping to convince everyone they are a “media” company and get a big valuation for their investors, and a money-making purveyor of spam through their huge portfolio of domain names with nothing but adsense ads, along with their enom registrar which sells hosting and other things that hardly make you media darling. Beware of a company that never talks about the stuff it does that makes money! Look over here, not over there!

    This CEO has been investigated by the NY Attorney General for spyware, taken a company into bankruptcy, hyped MySpace until he could dump it on an unsuspecting Murdoch (all the while collecting big $$ while denying employees their options). This is hype-fest. Didn’t we learn anything in Web 1.0???

  5. Hey Om,

    Now they have raised as much money as they have revenue, why are they laughing all the way to the bank?

  6. The question is:

    Is it a problem with the content providers, or with the search engines?

    Search engines are build around the assumption that “people” will create new relevant info, link to each other to build their case and special authoritative entities get a higher ranking.

    The web was basically build with/for academics and the reputation system it implies in mind. People in that area of writing would not just duplicate a paper with the same context just for the heck/money of it.

    Now we have SEO, who cares about reputation. We can get a high ranking by linking even irrelevant/duplicate info and there is no established authoritative data in most business cases anyway.

    Context duplication rules, just search for iPad. If they can find readers and make money, good for them. But to me this highlights the coming end to keyword search.

  7. Om,
    balanced post. personally, i find ehow a useful service. very different from About.com which is sterile and sufffers from excessive pagination and Ad bloat.

  8. Amy Westervelt Friday, February 5, 2010

    Obviously they’re producing the content people want. The problem is getting people the information they don’t necessarily want, but probably need. That’s the role that newspapers and investigative journalism play, and since there aren’t a lot of billionaire’s willing to run the philanthropic version of the LA Times and put their resources toward investigative stories, those stories aren’t going to be produced. But Rosenblatt is a businessman; it’s not his job to inform the public, it’s his job to give them the crap they want and make money off it. People get all pissed off about Demand Media, but it’s misplaced anger IMHO.

  9. “Writers can make anywhere from $15 to $1,000 for a piece of content.” I challenge Rosenblatt to show one instance of a writer being able to make over $20 for a piece of content in his Brave New World of writer exploitation.

    This is certainly no longer possible on his eHow.com site. He has been using inside information to compete against the writers who made eHow what it is for months, and is now systematically and fraudulently squeezing them out of that site, while continuing to reap record profits from their work.

    Demand Media is currently quietly and quickly trying to settle with eHow members that they STOLE content from by copying their articles to a site they call “eHow UK” that is located in the US, and not paying those writers for six months. They had no intention of paying those writers, and would not have if they had not been caught stealing, lying, and manipulating SEO on the mirrored site.

    EHow members fought tooth and nail for months over this issue to force Demand Media to admit just a portion of their fraudulent tactics, and still have seen no payment for their stolen content.

    EHow finally announced last week that they would “generously estimate” profits [they stole] from those writers and would compensate them. It remains to be seen what Rosenblatt’s definition of “generous” is. Watch for a class action suit (individual suites have already been filed) in the near future if Demand Media fails to make ammends.

    I can back up every allegation I have posted here with dates, times, and graphic documentation.

  10. The real winner isn’t Rosenblatt but Google. They essentially own half the site given Adsense is the money generator. I make a point to skip over eHow anytime I see it. It would be awesome if the writers banded together to form their own site.

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