June 16, 2010 6:59 pm

Google eyes Demand Media’s way with words

Last week, Richard Rosenblatt, chief executive of Demand Media, basked in the spotlight as digital media cognoscenti and bankers gathered round him at New York’s Empire Hotel to toast his four-year-old company’s progress.

Founded in 2006, just six months after Mr Rosenblatt sold his internet company MySpace to Rupert Murdoch’s News Corp, Demand is already planning an initial public offering valuing it at about $1.5bn – based on a belief that it has discovered a low-cost but immensely profitable new model for online media.

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Demand’s secret ingredient is a set of algorithms that analyses search engine data and traffic logs for topics to identify keywords for which advertisers are likely to pay.

The topics are fed to a website and selected by 8,000 low-paid freelancers to base stories or videos on.

The stories and videos are then placed on Demand Media-owned sites such as eHow, an instructional video site, or sites such as YouTube. They are designed to appeal to advertisers who use Google’s AdWords system to bid on keywords.

Demand is now targeting ad buyers directly and has hired Joanne Bradford, the former head of advertising at Yahoo, to court higher priced premium advertising rather than relying on simply exploiting the keyword auction system.  

These algorithm-based systems, described by one rival executive as a “shotgun marriage of Henry Ford and Johannes Gutenberg, consecrated by the Internet,” allow Demand and others to pump out stories at blinding speed. Demand alone generates more than 180,000 stories a month on everything from “How to whiten your teeth” to “How to know if your waters have broken”. It contributes five times more videos to YouTube than any other single publisher.

As internet groups such as Yahoo return to their focus on creating online content “you’ll hear from [Demand Media] even more,” says Quincy Smith, a former adviser to Google and partner in Code Advisors, an investment bank focused on digital media.

AOL and Yahoo have banked on similar strategies. Yahoo agreed in May to spend about $100m to buy Associated Content, a company whose writers are also guided by search engine data.

Demand has become the 17th largest web property in terms of unique visitors, ahead of Comcast, the top US cable operator, and Vevo, a YouTube-backed music site, according to comScore, which tracks internet traffic.

But a recently granted patent to Google that appears to replicate one part of what has made Demand’s approach to content so successful could spoil the party.

Google’s patent on “identifying inadequate content”, co-authored by some of the search group’s leading thinkers, including Hal Varian its chief economist, details a similar system that analyses search engine queries to spot topics of high interest which are not readily available from publishers.

What Google plans to do with the patent or whether it will build a product is not known.

One person familiar with Google’s thinking said it had no intention of creating content to meet the needs it identifies and that there were “no immediate plans” to create a product based on the patent.

But if the world’s largest search engine were to build a system and offer it to all web publishers, as it detailed in the patent filing, the move could upend one of the hottest new fields of digital media creation.

“It would be enormously impactful if that is the road they went down,” says Ben Schachter, a technology business analyst at Broadpoint AmTech, a research firm. “If they created a platform that allowed anyone to create content and use Google advertising to monetise it, then it would be in direct competition with these other players.”

Executives in the low-cost online content business say Google’s technology hardly makes them obsolete, as discovering what people want is just one part of these systems.

Google’s entrance into the field could be “a significant change to the market,” says David Mason, senior vice president of AOL’s content platform.

“But just because everybody has access to that data doesn’t mean everyone has the underlying resources model to take advantage of that data.”

Daniel Blackman, co-founder of Howcast, an online instructional videos site, took to quoting T.S. Eliot in describing the gulf between discovery and producing good content: “Between the conception and the creation . . . Falls the Shadow”.

Mr Blackman added, “Content needs to be good and not only exist to address demand. [Discovery] is just the spark”.

Demand Media, which has become the most prominent of the new wave of content factories, says the contribution from Google or others of additional “opportunity data” would bolster, not diminish, its business.

Dave Panos, chief marketing officer of Demand says: “It is likely to help those that have the scale, speed, cost structure, systems and consumer experiences to take advantage of it”.

“It is hard to understand how this ‘levels the playing field’ for any company that doesn’t have all of the capabilities necessary to leverage it,” Mr Panos said of the prospect of Google offering the data to all parties.

Additional reporting by Richard Waters in San Francisco

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