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Demand Media: Search Spam or the Future of Content? January 31, 2011

Posted by David Card in Uncategorized.
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Demand Media’s successful IPO last week didn’t quite dispel the air of controversy surrounding the company. Demand has never been profitable, it and its content farm brethren are blamed for diluting search results and its content is damned as lightweight fluff written for near-slave wages.

But the controversy is overstated. Though Demand’s business model appears a little shaky, companies in online media should monitor it closely for lessons in content creation efficiency and targeting, and for potential partnership opportunities.

How It Works

Demand produces low-cost content to order based on its analysis of search trends, advertising rates, competitive content and its long-term value in terms of ad sales over time. It suggests topics based on that algorithmic analysis to a network of 13,000 freelancers. Those freelancers then write articles or make videos that Demand shows on its own highly search-optimized sites — eHow, Answerbag, Livestrong.com and Trails.com — or syndicates to partners like the San Francisco Chronicle and the NFL. It pays its freelancers $15 for short articles.

But this cheap, clinical approach to content creation inevitably offends journalists, and produces a lot of how-to articles of varying quality.

Limits to the Model

Demand Media content is at least mildly useful to the masses. Otherwise, it wouldn’t generate CPC revenues or enough clicks and links to influence Google results. That content is not hugely valuable, but it’s not as worthless as this this story, which compares Demand’s revenue per user to that of Google, implies — Google, after all, is one of the most profitable media companies in history. In contrast, Demand’s dollars per thousand page views on its own sites is showing modest growth, indicating the company is starting to move beyond low-CPM text ads into higher-value advertising.

In the most recent nine month period, Demand depended on Google for 28 percent of it revenues. It uses Google’s ad networks and has a revenue-sharing agreement for video content shown on YouTube. Two-thirds of the page views for its biggest site, eHow, come from Google, and search drives 40 percent of the views across its network.

But that dependence is one way. Google takes about a 15 percent cut of the ad revenues its network generates for partners (compare Traffic Acquisition Costs versus network revenues). So the $50 million Demand got from Google over nine months produced peanuts for the search giant. Any conflict of interest implied by Google making money from content farms just isn’t worth it, compared with the potential damage to Google’s reputation. Nonetheless, Google recently responded to chargers that content farms and spam were affecting search results quality. And Demand’s attitude that Google’s response had nothing to do with it isn’t entirely convincing. Demand’s Google dependency is a little scary.

How It Could Evolve

Yahoo acquired Associated Content, a content farm similar to Demand, and AOL has a rival freelance network called Seed, run by ex -New York Timesman, Saul Hansell. AOL’s Patch hyperlocal content network isn’t completely different from a content farm — and has search engine watchers equally concerned. Content farms are an evolution of the Times’ About.com property, and the Times considering investing in Demand. So clearly, Demand’s content farm model is attracting attention. Here’s how Demand might evolve it further:

  • Verticals. Some Demand properties align celebrity brands with topics (Lance Armstrong-health, Tyra Banks-beauty), but the company hasn’t invested much in higher-quality content for those sites, or in other verticals like technology, food, or older audiences that could command premium advertising.
  • Sponsored Content. With just a little polishing, Demand could apply its model to advertorial-like sponsored content and combine that with the social media tools it acquired via Pluck for advertisers.
  • Q&A and Content. Blending community-answered questions a la Quora with a content farm seems a natural fit – Mahalo may be steering this direction with video already.

Related Research: Google Needs to Fix its Spam Problem, Even if it Hurts

Question of the week

What can companies learn from Demand Media?
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Is Quora Worth the Hype? January 17, 2011

Posted by David Card in Uncategorized.
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Around the end of the year, the hype surrounding Quora kicked into overdrive. The Q-and-A site, founded by Charlie Cheever and ex-Facebook talent Adam D’Angelo, first raised eyebrows with a round of financing last March that valued it at $86 million. When it went into public beta last summer, the tech and business press got excited, and lately it’s being called the savior of search and the next Facebook. But is Quora worth all the fuss?

Quora enables anyone to pose and answer questions, and users can “follow” other users and topics. Much of the site’s charm comes from its audience: Famous and influential personalities from tech and VC regularly ask and answer questions. Bloggers and mainstream reporters are using Quora for story content and leads. And as über-blogger Roger Scoble pointed out, Quora has cleverly adopted key social media and real-time innovations to the Q-and-A space.

Search Replacement?

Arguably, Quora’s biggest innovation is “crowd curation.” Lately, the same blogger community that has taken to Quora has been complaining about Google. Google search results are cluttered with spam and links and low-quality posts from content farms like Demand Media, the bloggers charge. The solution? Relevancy enforced by human beings rather than algorithms. But hiring editors doesn’t scale as well as writing software, that is, unless you can crowdsource those editors for free, which is exactly what Quora is doing.

But Quora is also wisely allowing Google to index its content, and practicing SEO well enough that Quora answers are starting to show up in Google results. Google’s own PageRank algorithm has always harnessed some wisdom from the crowd by analyzing link popularity. To add relevance and force out spam, Google engineers are smart enough to create or license other indicators of authority and influence — whether that means baking in to its algorithms something like a Klout Twitter authority score or ratings derived from professional content databases.

Differentiating from the Crowd

Quora is far from alone in the Q-and-A space. Facebook’s barely launched Questions appears aimed at generating status update activity and real-time responses. It feels more like personal expression than knowledge management, and thus may be a bigger threat to a company like Formspring, whose Q-and-A pages Om likened to blog comments without the blog. LinkedIn Answers is geared to its professional audience, but doesn’t have much traction. Yahoo Answers, the granddaddy of them all, generates lots of page views but little in the way of revenues. Yahoo Answers are often cute or funny, rather than useful. To avoid a similar fate, Quora is scrambling — so far quite successfully — to impose protocols on its users for asking, answering, editing and tagging questions and answers in order to preserve their quality and add structure to the Quora data folksonomy.

But for all the talk of its usage “exploding,” Quora’s community and traffic is tiny. It caused a minor scandal over its self-reported registered user count, which remains below half a million. Quora’s traffic is half the size of Formspring’s and dwarfed by Yahoo Answers. True, Quora could grow, and probably maintain at least Wikipedia-like quality, but it has a long way to go.

Of course, Quora has no revenue streams. Advertising or job boards a la programmer site Stack Overflow require scale. Quora’s evolution might take the following paths:

  • Expert network. Gerson Lehrman Group, for instance, has built a multi-hundred million dollar business by brokering paid one-to-one communications between experts and questioners. So far, Quora depends on altruism and self-promotion to incentivize its answers.
  • Interest graph supplier. As with any robust social medium, Quora could collect — and license — information on personal interests. But it still needs scale to build privacy-secure personal info into anonymized segments useful for marketers.
  • Magazine. Quora could indeed survive as an independent, engaging content destination — what it is now — but its model would be that of an online magazine. It could sell brand-oriented or contextually related advertising aimed at a small, but desirable techie audience. But does Quora really want to be Salon?

Question of the week

Is all the hype surrounding Quora merited?

How Much is Facebook’s Market Power Worth? January 10, 2011

Posted by David Card in Uncategorized.
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Perhaps you heard some noise this week about a $50 billion valuation for Facebook. Or mumblings about a nine-month profit of $335 million? Or a potential IPO in 2012? Putting a value on Facebook is beyond my pay scale. But it is the most important player in social media, and social media — along with mobile — is driving innovation across the entire technology spectrum. To better compete against, partner with or invest in Facebook, it’s worth evaluating its market positions, strengths and weaknesses.

Facebook itself is a consumer company, playing in the still-ripening consumer Internet fields of communications, content and commerce. It’s also a platform player, and platforms with rich ecosystems of developers are one of the best and most defensible businesses ever — just ask Microsoft. And Facebook’s platform is not just about scale; it has a shot at a being a real network effect, with the accompanying implications of high growth, customer lock-in and winner-take-all opportunities.

Platform and Ecosystem

Facebook has established itself as one of the largest Internet companies in terms of audience reach, frequency of usage and ability to drive traffic to other online sites. It’s social media ecosystem is healthy and growing. It continues to spawn investment in advertising and marketing services, and the success of companies like Zynga hint at how other developers in entertainment apps, location-based services and social commerce could build solid businesses.

Facebook’s APIs, Likes and Connect are widespread. Its messaging strategy could provide a universal inbox — or even presence manager — for some of its users, but isn’t suited for corporate or marketing email, and isn’t likely to replace personal email for most consumers online. While Facebook has a chance to make its platform the single most important one in social media, I suspect the current proliferation of APIs and mashups from many players, including Twitter, Google and Microsoft, will continue. There’s too much data being created now for a single social graph to dominate.

Net: Facebook should remain a leader in consumer technology, but likely won’t establish a winner-take-all platform.

Advertising

Advertising is Facebook’s primary revenue stream, and advertising is a business driven by economic cycles and demands ever more cross-media campaign coordination and ROI measurement. Facebook makes less money per user than does Google or Yahoo. It offers self-serve, relatively low-cost display advertising and is just beginning to exploit the rich targeting capabilities of its social graph for those and other display ads. When it does, and as it builds out sponsorship opportunities and measurement systems, it will be able to raise prices and garner more brand advertising spending.

Facebook barely participates in the biggest sector of online advertising — paid search. It has a promising Microsoft partnership, but there’s little evidence that users will do commerce-related searching on social networks. Facebook says it has no plans to build an ad network to tap its social graph outside its own site, and doesn’t charge brands for status updates, its closest equivalent to email marketing.

Net: Facebook is well beyond critical mass and has achieved mass media status, with plenty of growth opportunity. That said, Facebook is an Internet-only media company that should focus on and beef up its efforts in brand advertising, and establish partnerships for search, ad networks and email marketing.

Other Markets

Virtual goods from social games provide Facebook with $250 million in revenue, but the company shows no interest in other digital goods like music and video, perhaps due to their competitiveness and thin margins. Net: Facebook is strong but limited in digital goods, a profitable, but not huge business.

E-commerce may provide some opportunity for Facebook retail storefronts, but the online mall approach never worked for portals like Yahoo and Aol. Net: Facebook is well-positioned to play a social commerce role in customer acquisition and retention, but unlikely to have significant influence in online or brick-and-morter retail transactions.

Question of the week

Just how strong an industry force is Facebook?