Demand Media (DMD) had a strong first quarter, with revenue up 48 percent year over year and 10.8 percent compared to the last quarter of 2010, and a 32 percent year-over-year growth in page views. But the company says that the page view surge was an unusual spike that won't continue next quarter.
More importantly, the search algorithm changes that Google (GOOG) began to implement in late February had a significant impact on the business, particularly with the second round of changes in April. As a result, Demand will change its content strategy, focus on longer content with original reporting, and possibly remove a lot of short low-quality content that helped launch the business.
Certainly the numbers without context look good. On its own sites, page views were not just up 32 percent year-over-year, but grew 17.3 percent over the previous quarter. However, page views for Demand's content network, the larger source of traffic, was down by 2.6 percent sequentially, which is the first time since at least the start of 2009 that either network or Demand's owned-and-operated page views dropped between two sequential quarters. And the big hit to traffic from the second wave of Google's changes happened in April, after the quarter that Demand reported.
Another weakness was in RPM, or revenue per thousand page views. There was a drop of 0.8 percent for owned and operated RPM. That's not necessarily a problem and may show some seasonality. Between Q4 2009 and Q1 2010, RPM for owned and operated was down 8 percent. However, RPM for network traffic is a different case. Since the first quarter of 2010, RPMs have tended to drop every quarter (click graph to enlarge):
However, Google's changes are a problem for Demand. For example, CEO Richard Rosenblatt said that eHow, the company's flagship site, saw a net 20 percent decline of search engine referrals. Demand is trying to understand what will change it needs to do differently to increase its standings again in Google's results.
Once change will be a focus on longer-format features with original reporting. That will increase costs, though the company says that it can still obtain material economically and "at scale." However, that will put an end to the crank-it-out strategy that many writers doing work for Demand have used to justify the low pay.
Also, Demand experimented with its Livestrong.com site and dropped low-quality content. The result was increased Google-referred traffic to the remaining material. Demand will pursue a similar strategy at eHow. At one time, users could submit content. The company would not review the content but would pay a percentage of page view ad revenue. Rosenblatt said that the company ended taking new content under that program a year ago. Now Demand plans to remove all those articles to gain control and improve quality -- and, hopefully, traffic.
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