Santa Monica’s Demand Media Inc., publisher of online brands such as do-it-yourself website eHow.com and fitness resource Livestrong.com, was a high-flier when it debuted as a cheap content mill that gamed search engine results. Then Google Inc. altered its algorithm to direct searches to higher-quality content and Demand spent the better part of the past five years bleeding cash and seeking a way forward.
Chief Executive Sean Moriarty, who joined the company in August 2014, thinks he’s finally found a way to right the ship: shifting to e-commerce could help return it to profitability by the company in August 2014, thinks he’s finally found a way to right the ship: shifting to e-commerce could help return it to profitability by year’s end.
Gone are several of its former businesses, including arts and crafts website Creativebug, social media engagement tool CoverItLive and domain registry Rightside. Layoffs and other cost-cutting measures have reduced the company’s expenses by 21 percent since 2013. Cash from spinoffs and budget cuts have helped Demand eliminate its debt and build a cash cushion of $38.5 million, according to Securities and Exchange Commission filings.
Moreover, the firm is working to substantially increase the quality of its content and distance itself from its content farm reputation, Moriarty said.
“The idea that you can produce low-quality content and yoke it to a single distribution form, i.e., search, to me is flawed,” he said. “You just end up with a moment-in-time arbitrage opportunity. If you look at the history of what essential platforms do to arbitrage players, they squeeze them out violently.”
Change in fortune
The holding company for a portfolio of Internet properties has been bitten badly by its reputation as a content farm, an industry term for a publisher that cares more about editorial scale than quality with the goal of luring in Web surfers and advertisers.
After Google recalibrated its search engine formula in 2011 to partly reject cheap content, Demand’s market capitalization shrunk dramatically, from more than $2 billion to about $100 million today. Last year, the company lost $43.5 million on revenue of $126 million, the latter figure representing a 27 percent drop compared with 2014.
Demand has purged its archives, removing 2.4 million articles from eHow, reducing the count to 625,000.
“There’s never been a better time, I think, to be a publisher, if you are good,” he said. “We eliminated a lot of duplicative content and we are now building off of what we believe is a much more stable base.”
Over the short term, the new editorial philosophy has had a negative impact on ad revenue from Demand’s websites. While publishing revenue represented 79 percent of the company’s total in 2014, that number fell to 59 percent last year.
The growing popularity of mobile ads among marketing firms has also contributed to revenue decline, Moriarty said, because they sell for less than desktop ads.
“The consumer-facing online world is moving at the speed of light toward mobile and video,” said Laura Martin, a senior analyst at Needham & Co. in New York, who said improving in those two areas are Demand’s biggest challenges.
Moriarty acknowledged the need for better mobile and video products, and said the company is making progress on those fronts. Demand has changed all its sites to responsive Web designs, which makes viewing content on mobile phones easier, and it has boosted its video production capabilities, he said.
Demand is increasingly relying on revenue from its fast-growing e-commerce businesses, which include print seller Society 6 and fine art marketplace Saatchi Art. The company’s combined e-commerce revenue grew by 47 percent last year to $52.2 million and now represents 41 percent of its revenue.
In addition to art prints, Society 6 makes and sells custom iPhone cases and T-shirts. It was bought by Demand in 2013 for $94 million in stock and cash. Saatchi Art is an online marketplace for artwork that was acquired in 2014 for $17 million in cash and stock.
And that’s when Moriarty joined Demand. As chief executive of Saatchi Art at the time it was picked up, he became the parent company’s chief executive, replacing co-founder Shawn Colo. Demand said at the time that it sought Moriarty for the job because of his experience leading a publicly traded company and growing e-commerce operations. He had served as chief executive of Ticketmaster Entertainment Inc. from 2004 to 2009, when it merged with Live Nation Worldwide Inc. of Beverly Hills.
Moriarty said he agreed to lead the turnaround effort at Demand after perceiving value in a company others had ignored.
“The two hardest things to get in consumer Internet are significant revenues and big audiences,” he said, adding that Demand had both. “I had the belief that if our products were higher quality we could grow our audiences and grow our revenues.”
Leadership test
Moriarty’s experience seems to have reassured at least some investors. In response to his hiring and turnaround efforts, Shervin Pishevar, founder of San Francisco venture capital firm Sherpa Capital, acquired about 2 percent of Demand’s outstanding shares in 2014.
Greenbrae investment firm Osmium Partners has accumulated a 9 percent stake over the last year, motivated in large part by Moriarty’s quality-focused turnaround efforts, said Managing Partner John Lewis.
Shares of Demand closed at $5.08 on March 16, in the bottom half of its 52-week trading range of $3.94 to $6.89.
“We see a business that was left for dead, but that is doing the right things,” Lewis said.
While analysts say Demand is on track to become profitable by the end of the year as projected, some also believe that it’s time for the company to start thinking beyond immediate profitability.
Sameet Sinha, senior equity analyst at Westwood’s B. Riley & Co., said Demand needs to focus on growing its audience again and add more lucrative video content.
That will be the true test of Moriarty’s performance, Sinha added.
“He’s trying to turn around something that is sinking quite fast,” he said.
