Former Owner of eHow Says Demand Media Model Is Flawed

Demand Media (s dmd) has been getting a lot of attention since its initial public offering, which gave the company a market value of more than $1.5 billion. Much of that attention has been less than favorable, however, focusing on Demand’s status as a “content farm” that produces huge volumes of disposable, low-quality articles that are designed primarily to show up high in Google (s goog) searches. Josh Hannah has a unique view on Demand’s business model, since he’s one of the former owners of eHow, which makes up the core of the company’s web-content engine. In an interview earlier this week, Hannah said that Demand’s approach to the business has a number of significant flaws.

The story behind eHow is a fascinating one: The site was originally founded in the early years of the first web bubble, in 1998, and was financed by one of the top VC firms at the time, Hummer Winblad. The site raised a total of $36 million and hired more than 100 writers and editors, Hannah says, in an attempt to create a content portal very similar to what Yahoo and AOL have been doing more recently. But according to the former eHow owner, the costs of the operation spiraled out of control and it never made much revenue at all. “It was wildly unprofitable,” he says. “In 2000, which I think was their best year, they made about $800,000 — the cost base was just super high.”

After a couple of other incarnations and owners, Hannah and his partner Jack Herrick bought eHow for $100,000 in 2004. At that point, Hannah — who is now a partner at the venture capital firm Matrix Partners — was looking for something to do because he had sold his previous company, a UK-based online gambling operation called Betfair, and had moved back to Silicon Valley.

When Google Made Web Content King Again

The key to the turnaround of the site was the same insight that sparked Demand Media’s interest in buying eHow: namely, the realization that all of the content that had been created for it (much of which was higher quality than the more recent output, according to Hannah — something he has also written about on Quora) could become very valuable if it were tied to Google’s AdSense and showed up in search engines. Everyone is used to that idea now, says Hannah, but in 2004, people were still just figuring out what Google’s page-rank meant and how to use it to generate revenue.

The number one thing I thought was that content was going to be valuable again — there had been four years or so of no one creating any web content, because no one could make any money at it. But I knew if you could get it into Google’s algorithm, you could make money that way.

Ironically, the original owners of eHow had actually blocked Google’s search engine crawlers, because they wanted to try to monetize the site themselves through a landing page with offers from various advertisers. So Hannah and his partner opened up the site and optimized it for Google, and within two years, eHow had more than six million monthly uniques — without even creating any new content. Most of the articles were “evergreen” or “long tail” content about topics like how to tie a tie, or how to make guacamole. By 2006, when Demand Media bought it, the company had an annual revenue run-rate of about $4 million, up from virtually nothing.

Demand CEO Richard Rosenblatt

Is Passionate Content Better Than Paid Content?

The problem for Demand now, says Hannah, is two-fold: It can’t go on creating new content endlessly, because much of the “evergreen” content is already out there, and newer content about how to use an Android device, or how to burn DVDs, is going to be a lot more time-dependent and will lose value very quickly. “There’s going to be this declining value over time,” he says.

In addition, as we have pointed out here a number of times, Demand faces a very serious risk of Google simply devaluing its content by tweaking its algorithms to push down results from “content farms,” something Google staffer Matt Cutts suggested recently has become a focus for the search giant (although Demand CEO Richard Rosenblatt says this is not actually aimed at his company).

But the biggest issue, he says, is that Demand’s newer content is of lower quality than the original eHow content primarily because the company pays people tiny amounts of money to produce it. A site that Hannah is an investor in called WikiHow — which was actually spun off from eHow and is run by Jack Herrick — gets better quality results “because the articles are written by people who are just really passionate about the thing they are writing about,” which is very different from the “machine-like nature” of the content that Demand Media produces.

“I think Demand has a lot of challenges when it comes to making that work over the longer term,” the Matrix VC said.

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Post and thumbnail courtesy of Flickr user James Jordan