On Your Mark, Get Set: Demand Media Files For an IPO

Demand Media is getting its house in order for what could be one of the biggest initial public offerings (IPOs) by a web company this year (assuming Facebook doesn’t surprise everyone and go public). The online content company, which some critics have disparaged as a “digital sweatshop” or “content farm,” filed an S-1 disclosure document with the Securities and Exchange Commission this morning, the first step on the road to an IPO that is expected to hit the market later this year. Although no date or price is included in the document, a report earlier this year said Demand was planning to price its new shares this fall, and that the offering could value the company at $1.5 billion.

Demand has raised a total of $355 million in financing since it was created in 2006, including funding from Goldman Sachs, Oak Investment Partners, Spectrum Equity Investors and Generation Partners. Goldman Sachs is leading the IPO, along with other major brokerage firms such as Morgan Stanley and Allen & Co. Pricing and the number of shares the company plans to issue will be included in later IPO filings. According to the S-1 document, Demand had revenues of $198 million in 2009 and recorded an operating loss of $18 million. In the first six months of this year, the company said it had revenues of $114 million and a loss of $4.2 million — and 26 percent of its revenue came from cost-per-click advertising deals with Google.

Founded by former MySpace chairman Richard Rosenblatt (who Om interviewed earlier this year), Demand Media’s main business is the production and sale of online content — text, images and video — that’s designed to attract keyword advertising based on specific topics. The company’s algorithms look at what keywords are being searched for most, and then pays freelance or contract writers and photographers to produce content for sites like eHow.com (which it owns) that will fit that description. So if Demand Media sees that keywords related to winter tires are fetching a high price on pay-per-click auction markets like Google’s (s goog), it will pay someone to write an article about how to change the tires on your car. The S-1 document describes the company’s main business in this way:

We are a leader in a new Internet-based model for the professional creation of high-quality, commercially valuable content at scale. While traditional media companies create content based on anticipated consumer interest, we create content that responds to actual consumer demand. Our approach is driven by consumers’ desire to search for and discover increasingly specific information across the Internet.

Demand’s model has been criticized by journalists for bringing a production-line mentality to what should be a creative pursuit, and for pushing down the rates that freelance and contract writers are paid for producing articles. The company typically pays writers between $5 and $15 per article for a short piece — something that before the Internet might have paid a writer as much as $100 — although in some cases, it also compensates writers based on a share of the ad revenue that their piece brings in. Demand competes with several other similar content-production companies, including Associated Content (which was acquired by Yahoo (s yhoo) in May for an estimated $100 million) and AOL’s (s aol) Seed.com.

In addition to producing generic content that is displayed through partnerships like the ones it’s signed with the San Francisco Chronicle and several other major newspapers including USA Today, the company also has branded content sites that it produces and/or manages, including the Cracked.com humor site and Tour de France winner Lance Armstrong’s Livestrong health site. In June, Demand said that it had 86 million unique visitors to all of its content-related properties and served up over 550 million pageviews. In addition to the content business, the company also has a domain-registry business called eNom, which some analysts believe contributes significantly to Demand’s bottom line.

In the “risk factors” section of the S-1, where companies are required to list the potential negatives that an investor should consider before investing in the stock, Demand includes:

  • a history of operating losses and the company’s limited operating history, “which makes evaluating our business and future prospects difficult.”
  • the possibility that the company’s relationship with Google “from which a significant portion of our revenue is generated” could be terminated or renegotiated on less favorable terms.
  • the dependence of the content business on “the success of eHow.com”
  • the potential that customers of eNom “may not renew their domain name registrations” or may transfer them to competitors.

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