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Demand Media’s IPO: The Google & SEO Aspects

Demand Media has filed for an IPO. The company, known as a content farm to some, produces much of its content on sites like eHow and others in direct response to what it determines people are searching for on the web. Its filing shed new light on how much it depends on SEO and Google, in particular. That’s interesting, because I’ve never known a company — a publisher — so dependent on SEO (outside of actual SEO companies) to go public before. Below, highlights on these aspects.

The SEO and Google aspects really get going around page 14 of the filing:

Page 14: Google Funds Big Chunk Of Demand Media

We have an extensive relationship with Google and a significant portion of our revenue is derived from cost-per-click performance-based advertising provided by Google. For the year ended December 31, 2009 and the six months ended June 30, 2010, we derived approximately 18% and 26%, respectively, of our total revenue from our various advertising arrangements with Google.

Got that? Demand Media currently gets more than 1/4 of its income from Google ads, 26% for the current year through June 30, up from 18% in 2009. This section goes on to outline the risk that Google could terminate those agreements or not generate as much revenue as it current does for them. Sure, but unlikely, I’d say. Then again, changes like this did undermine Geosign. The Financial Post has a long story about this, which I can’t find on its site but which you can read archived here)

Page 18: The Importance (And Risk) Of SEO

Another method we employ to attract and acquire new, and retain existing, users and customers is commonly referred to as search engine optimization, or SEO. SEO involves developing websites to rank well in search engine results.

Our ability to successfully manage SEO efforts across our owned and operated websites and our customer websites is dependent on the timely modification of SEO efforts from time to time in response to periodic changes in search engine algorithms, search query trends and related efforts by providers of search services designed to ensure the display of unique offerings in search results.

Our failure to successfully manage our SEO strategy could result in a substantial decrease in traffic to our owned and operated websites and to our customer websites through which we distribute our content, which would result in substantial decreases in conversion rates and repeat business, as well as increased costs if we were to replace free traffic with paid traffic. Any or all of these results would adversely affect our business, revenue, financial condition and results of operations.

If you’re not familiar with SEO, our What Is SEO / Search Engine Optimization? page provides a short primer. As the filing describes, it’s the practice of generating traffic from search engines for free, akin to public relations (versus advertising).

As with public relations, good SEO can increase the odds of generating traffic, but that’s not guaranteed. This is a major risk factor, as the filing gets into more.

Page 18: Search Sends Nearly 40% Of Traffic; Google Alone, 26% Or More

We depend in part on various Internet search engines, such as Google, Bing, Yahoo!, and other search engines to direct a significant amount of traffic to our owned and operated websites. For the quarter ended June 30, 2010, approximately 40% of the page view traffic directed to our owned and operated websites came directly from these Internet search engines (and a majority of the traffic from search engines came from Google), according to our internal data.

So Demand Media gets about 40% of its traffic for free, most of which comes from Google. How much from Google? That’s not said.

Google’s generally estimated to have a 65% share of the search market in the US, which means using that figure, Demand Media gets about 26% of its traffic from Google. However, site operators routinely report that they receive 80% or more of their search-related traffic from Google. That would put Demand’s traffic from Google closer to the 32% mark.

Page 19: Traffic Is Vulnerable To Algorithm Changes

Our ability to maintain the number of visitors directed to our owned and operated websites and to our customers’ websites through which we distribute our content by search engines is not entirely within our control. For example, search engines frequently revise their algorithms in an attempt to optimize their search result listings.

Changes in the methodologies used by search engines to display results could cause our owned and operated websites or our customer websites to receive less favorable placements, which could reduce the number of users who link to our owned and operated websites and to our customers’ websites from these search engines.

Some of our owned and operated websites and our customers’ websites have experienced fluctuations in search result rankings and we anticipate similar fluctuations in the future. Internet search engines could decide that content on our owned and operated websites and on our customers’ websites, including content that is created by our freelance content creators, is unacceptable or violates their corporate policies.

Any reduction in the number of users directed to our owned and operated websites and to our customers’ websites would negatively affect our ability to earn revenue. If traffic on our owned and operated websites and on our customers’ websites declines, we may need to resort to more costly sources to replace lost traffic, and such increased expense could adversely affect our business, revenue, financial condition and results of operations.

This is the key section to me, and I’m glad to see it’s included. As I said, we’ve never had a company that I’ve known of go public with a business model that’s so dependent on gaining traffic from search, in particular from Google.

To date, Google’s shown no heavy signs of putting a crackdown on “content farms.” However, there’s no lack of public attention about companies like Demand Media and ample criticisms that they seem to walk all over Google, ranking for whatever they want, with low quality content. The IPO even speaks to this on page 20:

Perception that the quality of our content may not be the same or better than that of other published Internet content, even though baseless, can damage our reputation. We are frequently the subject of unflattering reports in the media about our business and our model.

It’s not all baseless criticism, but neither is it all true. Plenty of content from Demand Media and its brethren is good and helpful. But plenty of it can also be substandard (just as there’s plenty of substandard content outside content farms).

As Google continues to come under pressure about these concerns (here’s just one of many examples), I think it’s likely we’ll see them institute an algorithm change to further weed-out low quality content. By algorithm change, I mean a change to Google’s computer “algorithm” recipe that’s used to sift through all the pages it has collected and decide which are the best to list.

That might have an impact on Demand, just as it might have an impact on publishers all over the web, large and small. But because Demand seems so much more dependent on Google than many other publishers, the risk is much higher.

The head of Google’s web spam team, Matt Cutts, did address content farms tangentially when discussing Google’s “MayDay” algorithm change recently at our . From his :

Mayday is about looking at the state of web content in 2010 and what signals do we use to differentiate between quality and, for example, content farms. He says people affected by this update should step back and look at how much content they’re generating and how close does it come to being spam.

Amit Singhal, who oversees Google’s ranking algorithms, was also asked about content farms in a Financial Times article recently. But he didn’t specifically say they’d receive any special attention. From the article:

“If there is an information gap out there and someone fills that gap, it’s good for the world,” says Amit Singhal, the Google engineer responsible for its ranking algorithm

Bottom line? My gut says that when your business model is all about making money off Google for free, rather than making money by publishing content that taps into Google as a side benefit, you show up on the radar of Google’s search quality team as a potential threat requiring close attention. That doesn’t mean you get shot down, but one of the best ways to avoid trouble at all is to stay off the radar in the first place.

Page 21: Mining Search Data

We collect data regarding consumer search queries from a variety of sources. When a user accesses one of our owned and operated websites, we may have access to certain data associated with the source and specific nature of the visit to our website. We also license consumer search query data from third parties. Our Content & Media algorithms utilize this data to help us determine what content consumers are seeking, if that content is valuable to advertisers and whether we can cost-effectively produce this content. These third-party consumer search data agreements are generally for perpetual licenses of a discrete amount of data and generally do not provide for updates of the data licensed.

There are a number of keyword research tools, such as those from Google, that allow mining of what people are searching for. However, it is far more effective if you have access to an entire database of search activity, so that you can do direct research. Demand Media has access to some tools like these (places like Hitwise and comScore both provide such databases). I’m a little surprised the exact sources aren’t named, as that’s a potential risk factor — knowing the exact sources helps you judge the quality.

Read the rest of this post at SearchEngineLand…

About The Author – Danny Sullivan is editor-in-chief of Search Engine Land. He’s a widely cited authority on search engines and search marketing issues who has covered the space since 1996. Danny also oversees Search Engine Land’s SMX: Search Marketing Expo conference series. He maintains a personal blog called Daggle, can be found on FacebookGoogle Buzz and microblogs on Twitter as @dannysullivan.

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