Los Angeles Business Journal: Niche Riches

Niche Riches
By BOOYEON LEE – 5/21/2007
Los Angeles Business Journal Staff

The business model is deceptively simple.

Former MySpace.com chairman Richard Rosenblatt believes he has figured out how to cash in on user-generated content and the desire of bloggers to be famous.

It works like this. Demand Media Inc. buys a slew of well-traveled enthusiast Web sites, such as Trails.com, Golflink.com and Gardenguides.com. The sites go through what Rosenblatt calls a “carwash,” where they are given cleaner interfaces and social networking tools. With luck, traffic quickly swells and the Web site ends up with what every advertiser wants – a captive audience that is passionate about the subject.

There’s hardly any production cost because the content is user-generated. There’s little marketing cost because it’s search-driven. With minimal investment, the company gets to sit back and watch ad revenue stream in from Google AdSense and similar programs through Yahoo! and Ask.com, which places contextually relevant advertisements on the Web sites. So far, the company has bought 50 sites and is on a hunt for more.

“You replicate these kinds of acquisitions 1,000 times and you’ve got a business,” said Charlene Li, analyst at Forrester Research. “It’s pointing to the fact that the Web is fragmented. It’s not about scale.”

Only a year old and pumped with jaw-dropping $220 million in venture funds, the company already has 260 employees and projects $5 billion in market cap by 2010.

From the company’s Santa Monica headquarters, designed like a bar with plush couches and a high ceiling, Rosenblatt clicks on his recently acquired Grab.com. It’s a hodgepodge Web site with downloadable games and cartoons that boasts 1.5 million members. He clicks on a profile called Pookie.

“Pookie has decided to come on Grab.com and produce all this content. How do they have all this time? They just do. Little crazy profile by Pookie’s been viewed 5,000 times,” Rosenblatt said. That’s 5,000 views of six units of advertisements paid to Demand Media on a cost per impression basis.

Making people famous

Demand Media targets niche, vertical Web sites where there’s loyal, dynamic streams of traffic. This includes sites for golfers, knitters, runners, gardeners, and bird watchers.

These sites become online communities, like that of the well-known MySpace, which allows people to put up profiles, publish and write to each other.

For Rosenblatt, perhaps the most important lesson learned from taking MySpace from a fairly unknown social networking site to a household name with more than 100 million users is that allowing people to form communities online increases traffic.

Take, for example, Gardenguides.com, a Web site that Demand Media bought and relaunched in April, after giving it a makeover and a social networking forum. Traffic increased 300 percent, according to the company.

“There really is no other medium I can think of where somebody can count on a zero content cost and be able to sell advertising against it,” Rosenblatt said. “The Internet allows that by the fact that people generate their own content.”

A bonus for acquiring Web sites for enthusiasts is that users are likely to produce high-quality content, said John Hawkins, managing partner for Generation Partners, who sits on the company’s board.

“It’s human nature. People spend time on what they care about,” Hawkins said. “You can’t pay me enough to write about neurophysics, but I love writing about fly fishing and having people read about it and commenting on it. If you’re an advertiser, you want to sell fishing rods on my site because I’m only getting people passionate about fishing.”

But the company wanted to do more than rely on human nature to produce first-rate content. How do you inspire people en masse to produce something worth reading? Demand Media decided to make them famous and pay them.

On the company’s recently acquired eHow.com, a Web site with how-to information on just about anything, any article that users publish gets lifted to the top of the Google search within a week.

The eHow site is so well crawled by Google with so many backlinks, articles posted on the Web site are viewed by millions of Internet users in a matter of weeks.

Writers on eHow also will get paid. On June 1, Demand Media will roll out what’s called a user-compensation system in which bloggers on eHow will get a share of ad revenue their articles garner. The money will be deposited each night into each user’s PayPal account, an e-commerce payment system, and a tab called “My Earnings” will detail how each element of the page was monetized.

Demand Media estimates that conservative annual earnings for each user will be about $100 per page. The company plans to roll out the user-compensation system to its other Web sites, including Deals.com, a Web site for bargain hunters; Answerbag.com, where you can post a question about anything and get answers; and Soyouwanna.com, a how-to site.

The best written, most highly rated articles will rise to the top and bring in the most ad revenue, based on cost per impression of Web banners and text links. The worst copy will sink to the abyss of cyberspace.

“I am a huge believer in the wisdom of the crowd,” Rosenblatt said. “You get enough people together and there’s going to be some good content and some bad. Let the users be the judge. Even if there’s tons of junk, they’ll be up but no one will see it.”

On its way to becoming a user-generated powerhouse, the company also sits on a huge domain registry. Demand Media bought eNom last year, making it the world’s second largest domain registrar.

Earlier this month, the company began retailing domain names for anyone who wants to create video-centric Web sites and within 24 hours, the company made $500,000.

“The Web is getting more personal,” Rosenblatt said. “It’s embarrassing to have a Hotmail account. People want their own personalization.”

Democratized publishing

Making it easy for people to read and write about what they love and to connect with like-minded people is basically what Demand Media boils down to. This means creating online communities around people’s hobbies. It also means selling them domain names so they can brand their own Web sites.

Demand Media’s Santa Monica headquarters consist of about 80 developers, editors, and operations specialists and about 155 people solely dedicated to its domain registrar, which is maintained in Bellevue, Wash.

This is the future of media companies, said Hawkins of Generation Partners, who backs Demand Media along with venture capital funds Oak Investment Partners, 3i Group PLC and Spectrum Equity Investors.

“Demand Media is democratizing publishing,” Hawkins said. “Before, the only way for me to get a broad audience would be to buy a newspaper. Technology has enabled a new paradigm of publishing.”

Leveraging user-generated content allows Demand Media to circumvent one of the greatest challenges Internet media giants face today: finding relevant, quality content to advertise against.

But the whole idea of building a media company around user-generated content makes some raise their eyebrows.

“How will the company ensure that people who post the content have the rights to the content?” said Barbara Bickham, chief executive of Los Angeles-based TechGenii Inc., a consulting company that specializes in digital media and content.

More importantly, Bickham said, the company underestimates the institution of media and journalism.

“Just because I bought a camera and Final Cut Pro doesn’t make me a film maker. Just because I blog doesn’t make me a reporter or a writer,” Bickham said. “It still has to be compelling, it has to connect with people, and you have to be able to tell a story. It’s a craft.”

But the power shift from institutions to grass-roots online communities has already begun in the Internet media world, said Forrester Research analyst Charlene Li.

“Before, media companies and traditional marketers controlled forms of distribution,” Li said. “With the Internet, technology has put power in the hands of users. Anyone who can fill out a form can publish. If I’m a lone blogger, it’s like an echo in a forest and no one can hear you. If I join in with a bunch of people writing about the same thing, it’s a lot more powerful.”

By and large, most people Li refers to are young. Almost a third of all youth, from age 12 to 21, publish a blog at least weekly and about 40 percent visit social networking sites daily, according to a Forrester report released in April.

This means that it could be only a matter of time before they will soon replace huge pockets of the population who still have no idea what domain registries and vertical Web sites mean, and Demand Media’s business strategy becomes less cutting-edge and more mainstream.

Rosenblatt, 37, who launched his first Web-based company in 1996, is OK with the idea of the rest of the world catching up.

“I’ve been in the Internet business for so long. It’s just what I understand. I don’t understand anything else,” he said.


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