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Rocco Pendola is an editor at Seeking Alpha.
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  • Why the Hatred for Demand Media? 0 comments
    Feb 6, 2011 10:48 AM | about stocks: DMD
    Tweets, blog posts, and even entries on sites such as Seeking Alpha abound wishing death on Demand Media (NYSE:DMD), an online content producer that went public last month. For example, a twitster and blogger who calls himself "The Reformed Broker" appears obsessed with DMD, chiding the company's CEO Richard Rosenblatt as "delusional." The Reformed Broker curses, produces analogies, and calls DMD several names including "Spam Central" in his scathing critique. One of the more measured assessments comes from Kevin Berk on Seeking Alpha, who makes a sound case for shorting the stock. 

    Early disclosure: I freelance for DMD. I write through Demand Media's Studio with my work appearing on eHow, SF Gate, and theNest.com. I also do contract work separate from the Studio, editing trail guides for the company's site, Trails.com. I feel my position as a writer/editor with experience at DMD and my emergence as a trader helps me provide a leveled view of both the "positive" and "negative" aspects of DMD. Of course, positive and negative and good and bad dichotomies wallow in relativism. My life experience informs how I view both DMD's position in the world and my relationship with it. I have absolutely no concerns that DMD will penalize me because of my honest view of their operations; management seems to have reacted logically and calmly to views from the "inside" or, in my case, the "semi-inside," even if they appeared less than 100 percent glowing. 

    The Conflict

    I share some of the concerns expressed by DMD's detractors. I liken the materialization of the DMD model to what hit radio in full force more than a decade ago -- voicetracking. I started a radio career, as a youngster, at a small station in my hometown of Niagara Falls, New York. Luckily, I got into radio before the sell-outs and bean counters flushed the product and middle management's concern, defense, and nurturing of on-air talent down the toilet. After a 10-year career at primarily live and local stations, I found myself in the studios of a Clear Channel-owned rock station KSJO in San Jose, California. I was recording my contributions to about 20 hours' worth of programming in less than two hours, using a technique brought to the forefront by Clear Channel, known as voicetracking. Voicetracking allows stations to record entire shifts ahead of time, paying on-air hosts only for the time it takes them to execute voicetracking's mechanics. It also lets radio companies offer opportunity to a few, while wiping it out for everybody else. A host in Dallas, for example, hosts a live afternoon drive show on a station there, while voicetracking several other shifts for stations across the nation. Instead of hanging myself because of Clear Channel-induced depression, voicetracking merely cemented my exit from radio.

    DMD's model equates, in my mind at least, to voicetracking in several ways. Most obviously, it centralizes, streamlines, and, to a certain extent, homogenizes online content. When I write a personal finance article for the Nest or a real estate title for SF Gate, presumably, the Nest and SF Gate have saved on the cost of hiring employees, in-house, to do the same work. Whether I write these articles for the Nest, SF Gate, or a Demand Media-owned site such as eHow, I follow the same basic structural format for each article. To Demand's credit, they allow for leeway in terms of creativity based on the needs and styles of outside clients, which is why I qualified the "homogenization" comment. But, generally, DMD requests the same type of straight-forward, no-nonsense voice and evergreen content for most of the articles it asks its freelancers to produce. This frightens me, just like voicetracking on the radio dampened my spirit. 

    DMD's model of churning out online content differs from voicetracking, however, in key ways. Primarily, I contend that DMD takes a cutting edge approach to the production and dissemination of information, whereas voicetracking was a feeble attempt at cutting costs and destroying a product. Some would apply that critique to DMD; it doesn't wash. I can come up with a laundry list of live and local radio shows that died thanks to radio's ineptitude, which travels way beyond, but can be nicely summarized via the tale of voicetracking. Radio was better before voicetracking and homogenization took control of a once dynamic business. Radio continues to react, inefficiently, to attacks by everything from Apple's iPod to Sirius/XM to Pandora. When assessing DMD's impact on the world of information, however, I don't feel the same way. I cannot come up with a list of authors or "journalists" that DMD took out of the publishing business. If somebody can produce such a list, I doubt it contains names we simply can't live without. If anything, DMD has helped open the door to a wider variety of people who might not have gotten a chance through traditional channels. Although what they produce differs, I put DMD in the same category as the content arms of the Googles, Yahoo!s, and Huffington Posts of the world. Each has opened the door to more information, not limited it, like radio. While voicetracking's logistics might mirror DMD's model in many ways and compare in terms of impact, DMD sets trends; radio reacts to them. 

    Simply put, I am conflicted when I think about the scorn that exists for voicetracking and DMD. I cringe at the likenesses. I got out of radio because I did not see a future. In my opinion, DMD's model represents the future. It remains to be seen if DMD or another firm takes the future to the next level.

    The Good and Bad of DMD's Business

    The forthcoming views reflect my experience with DMD. I don't touch many areas, mainly because I have no direct experience with them and my opinions mean little in relation to what has already been offered elsewhere.

    First, my experience working for DMD has been nothing short of fantastic. While I agree that some of the articles they offer up and actually publish border on the inane, as a writer, you can pick and choose from literally thousands of titles. If you cannot hone in on a couple of areas of expertise, writing for DMD is probably not your bag. I write mainly in the areas of low-income housing and related urban issues and personal finance, with a focus on the basics of IRAs and other investing options. I have dabbled in other areas that peaked my interest. When I first started writing for DMD, I wrote exclusively for eHow at a clip of $15 per article. As I proved myself as credible, opportunities opened up. In the past three to six months, I have made between $17.50 and $20 per article writing for eHow Money, eHow Personal Finance, the Nest, and SF Gate. If you can research and write well, you can earn between $30 and $60 an hour writing through Demand Media's Studio. The contract work I do for Trails.com pays as well as any freelance editing job I have ever had. They pay well and on-time.

    Many of Demand's haters argue that working for them essentially amounts to slave labor. Others apply the same argument to the world of cold calling. Between 1999 and 2001, I worked for the obscure, yet massive company called Marcus Evans cold calling Presidents, CEOs, and VPs of sales and pitching them on sports hospitality packages. If you stunk at the job, you made $1,000 a month. If you were good at it, you could make ten times that or more. While the numbers don't get that high at DMD, the takeaway holds. If you can't manage to make more than $20 an hour writing for DMD, it's probably your fault, not theirs. Everybody thinks they can write. And everybody thinks they can sell... until they actually try it and fail. 

    From what I can tell, DMD weeds out bad writers. Bad writers hurt the product and make a site like eHow little more than a glorified Wikipedia. I think this represents one key to the company's future viability. eHow and other DMD-related sites must improve, evolve, and become obsessed with quality control for Demand to become a more credible player in the world of information generation. I think DMD realizes this and has taken significant strides in the right direction over the past couple of years.

    Additionally, DMD cannot put all of its eggs in the eHow basket. While eHow has served as a nice catalyst, I believe DMD recognizes that it must move beyond eHow. I look to the many contracts DMD has established over the last couple of years to provide content for other companies and sites, ranging from NFL.com to USA Today to relationships with brands such as Tyra Banks' Beauty and Fashion. If DMD succeeds in creating more of these types of deals, I think they position themselves favorably beyond eHow. 

    Along similar lines, others have written about how much Demand relies on Google's search engine to drive people to its sites, particularly eHow, and generate Google Adsense revenue. I am not sure as to the particulars of how DMD is cultivating its own sales team, but I would have to think generating its own advertising lists as a going concern and top priority. If DMD can secure more contracts to provide content and populate that content with advertising it sells directly, as opposed to relying on Google Adsense, it's prospects appear favorable in my eyes. This also licks the concern that DMD's content won't show up if Google tweaks how it generates search results. Undoubtedly, eHow articles such as "How to Groom a Man's Fingernails" might face Google's scorn, whereas more original and innovative content appearing in the travel section of USA Today, for instance, should not even come close to qualifying as spam. Here again, I have reason to believe that DMD knows this and is reacting in kind.

    If DMD can diversify its business, from content and advertising standpoints, I think it will grow considerably and become profitable. Certainly, the meat of doing this encompasses far more than I laid out, but I think my rough sketch of ideas is on target. If not, I fear comparisons to the IPO bubble of 2000 hold merit. DMD has offices in New York, London, Chicago, Bellevue, Austin, and Santa Monica. That's expensive real estate. I can only speak for the Santa Monica properties. One situates one block from the Pacific Ocean, while the other is only about two blocks away. I live in the area. It's paradise and worth every devalued dollar, but DMD, undoubtedly pays a premium for their locations. I have been inside one of their locations a handful of times pre- and post-IPO. Each time I helped myself in fully-stocked snack rooms and witnessed spreads of food brought in from the outside. They have parties and other perks for their in-house employees and freelancers from time to time. I am not sure that any of this equates to lavish spending vis-a-vis the IPO bubble days, but without, growth and, more so, profits to accompany this spending, DMD presents as a risky proposition. 

    Conclusion

    Much of the debate surrounding what Demand Media does is healthy. Some of it is little more than uninformed drivel. People, by nature, tend to get uncomfortable with change. I did in radio and the business effectively cast me aside. For many, the same dynamic is at work regarding DMD. They do things differently. Quite possibly, DMD represents the future... now. Not everybody wants to or is equipped to go along for the ride. Defensive positions, angst, and downright bitterness often ensue. I am not sure if DMD will prove to be a valuable investment. I do know that the people who run DMD are passionate and confident about what they do. I am pretty sure that they realize that they will fail if DMD exists in the exact same state it does now one or two or three years from now. If DMD can reinvest itself nimbly, while staying true to its core ideas, I wouldn't want to be short over the long haul. 
















    Disclosure: I am long AAPL, SIRI.

    Additional disclosure: I have no plans to initiate any positions in DMD within the next 72 hours.
    Themes: media, Internet, online content, IPOs Stocks: DMD
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