Can Demand Media Wean Itself From Low-Grade Content?

Demand Media (NYSE: DMD) may have pleased investors with better than expected (or less worse than expected) income losses, but the elements of the business that were once attributes are now the things holding it back: namely, its continued reliance on cheaply produced freelance content and its need for traffic referrals from Google.

Yesterday, Demand Media said that Q3 revenue gained 26 percent, though its losses widened to $3.3 million from $900,000 the year before.

While the company did manage to reduce traffic acquisition costs as a percentage of its revenue, it will simply have to spend more time– and probably money — developing better content. And that means going beyond celebrity deals with the likes of content partners like Tyra Banks and Rachael Ray or recent purchases such as IndieClick, which helps produce independent blogs in areas of fashion and culture.

Demand Media’s best-known business, eHow, has continued to see traffic growth for three straight months. And many believe that Demand needs to move away from what eHow does best — produce low-cost, keyword driven “how-to” articles — in order to establish real credibility. The company has been making some moves to try to address the very uneven quality of its Demand Studios freelance network. At the end of the summer, Demand freelancers received an email telling them that writers with low grammar scores would be placed in the Writer Evaluation Program (WEP).

At the same time, Reuters reported that Demand is in the process of scrapping articles that are deemed to be inferior. That could cost Demand Media $8 million in write-downs, a sign that at the very least, the company is aware of the perception issue and that it is willing to pay to try to fix it.