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Summary:

Demand Media says the latest changes to Google’s algorithm aren’t a big deal, even though they pushed its eHow unit down by as much as 65 percent, according to some estimates — but the reality is that Google is both Demand’s biggest partner and its biggest threat.

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Demand Media, the newly public content company that’s doing everything it can to avoid the term “content farm,” has been engaged in a head-to-head battle with Google since just before Demand issued its public shares. That battle got jacked up a notch or two recently, when the search engine tweaked its algorithm to crack down on what it calls “low quality content” and Demand’s eHow unit got caught in the crossfire. Demand says this isn’t a big deal, but the reality is that its biggest partner is also its biggest enemy, and that’s going to dog the company — and the stock price — for the foreseeable future.

Google’s first content-farm related algorithm update in February (known as the “Panda” update, the nickname of one of the engineers involved in designing it) hit a number of content companies fairly hard, pushing down results from Associated Content and Suite101, among others. But Demand’s eHow site — which represents a large proportion of the company’s content business and also a substantial chunk of its revenues — escaped with very little impact, which came as a surprise to many. In fact, some estimated the site’s pages were actually showing up higher in search, not lower.

That changed dramatically with Google’s latest algorithm tweak, however. It’s not clear whether the search giant rolled out its latest update specifically to target eHow and others who were missed in the first go-round, but according to at least two tests — one from Sistrix and one from Cnet  – eHow pages are now showing up as much as 65 percent lower in Google results. And the new algorithm changes were based in part on feedback from users about what webpages they found least useful.

Demand Media published a blog post late Sunday night saying the Google algorithm change did affect eHow’s rankings, but that estimates of the severity of the decline were “significantly overstated.” In the kind of careful language befitting a newly public entity, the blog post — which included a legal disclaimer almost as long as the post itself — said Demand expects to generate year-over-year page view growth “comparable to or greater than the year-over-year page view growth reported for Q2 2010,” which was 25 percent. The company also reaffirmed its financial guidance for 2011. Despite those reassurances, however, the stock price fell by close to 10 percent in early trading on Monday.

In other words, as far as Demand is concerned, things are just fine. But investors shouldn’t be quite so sanguine. For one thing, Google continually tweaks its algorithm, and there’s no reason to believe this is the last update related to content farms. And the big picture for Demand remains the same: namely, it relies on Google for an estimated 40 percent of its traffic and about 30 percent of its revenue, as described in its IPO securities filings, and therefore, the search giant holds the keys to its ongoing success in that market. Google has made it clear that “content farms” are a problem that needs fixing. As Demand said in the “risk factors” section of its prospectus:

Google may from time to time change its existing, or establish new, methodologies and metrics for valuing the quality of Internet traffic and delivering cost-per-click advertisements. Any changes in these methodologies, metrics and advertising technology platforms could decrease the amount of revenue that we generate from online advertisements.

Demand has said it’s working on boosting the quality of its content (something other “crowdsourced” content distributors such as Examiner.com are also doing in order to avoid the wrath of the great and powerful Google), but this is also likely going to increase costs at the company, another thing investors should be aware of. That and the need to constantly look over its shoulder at what Google is doing with its algorithm are going to be the biggest challenges facing Demand for some time to come.

Post and thumbnail photos courtesy of Flickr user Crystaljingsr

  1. Crowdsourced? Since when was Demand Media content considered crowdsourced? The ancient content from the pre-Demand days of eHow is user generated, but every piece of Demand content is produced by professional, tested writers and edited by copy editors with many years of professional experience. That’s not crowdsourcing. Go to eHow.com and Livestrong.com and Cracked.com and read any article. I doubt you’ll find one that you could objectively call “low quality” and “useless.” Too often people make judgments on conten quality without even looking at the content itself, just what they have heard someone else say about the content. I understand the relationship between Google and DM, but people fail to recognize that direct ad sales and direct site visits are growing rapidly and are becoming a much bigger portion of DM’s revenues.

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    1. Thanks for the comment, Michael — I used the term “crowdsourced” to refer to content created by a large group of contributors, some of whom are paid. And I recognize that many people may see Demand’s content as valuable — the big question is whether Google does.

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    2. eHow writer David Sarokin has defended the quality of eHow’s articles and I agreed with him that he wrote good quality articles. But he linked to topics which eHow seemed to have an endless number of articles about. Search for “how to make money online” on eHow and find more than a dozen pages of articles on that topic–David’s is the best. Even better than WriterGig’s. But most of the articles in that list of results are lousy. So my judgment on the site’s general lack of quality is based on having looked at it detail. Also, when it comes to direct ad sales, Joanne Bradford still hasn’t worked at the company as long as its last 3 rockstar heads of ad sales, so we’ll see how it goes. Lastly, you are wrong that DM doesn’t crowdsource some of its content. Are you saying people are getting paid for dares? How is a Livestrong dare not a perfect example of crowdsourced content? Certaintly it is more successful than eHow’s “I did This.” eHow never paid anyone a dime for clicking “I did This” and posting photos of what they did.

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  2. I think that when Google refers to ‘quality sites’ they increasingly mean those with content produced by salaried, professional writers. It’s hard to imagine companies that pay very little to mostly freelance/casual writers will ever be able to regularly produce content of the same quality as the Globe and Mail (www.globeandmail.ca)or New Yorker (www.NewYorker.com), for example. Demand Media would be wise, therefore, to boost traffic that originates from non-search sources.

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  3. Intreresting post. I argued a couple of weeks ago that Google is causing content farming, as much as it is trying to fight it. (http://koenvanturnhout.wordpress.com/2011/03/13/collateral-damage-of-the-robots-race-on-the-web/) It is interesting to see this from the side of Demand Media, who try to find a business nice in producing the cheapest content that ranks high at Google. Curious to find out where the optimum is.

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  4. With the latest google panda update, google slapped demand media pretty hard. Let’s see if they can recover

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