
Where Did Demand Media’s Profits Go? - bjplink
http://blogs.wsj.com/digits/2010/08/12/where-did-demand-medias-profits-go/
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patio11
I read their financial statements with interest. They have a charge in the $2X
million range for the latest year for amortization of non-tangible property.
Here's some semi-informed speculation for you: when you or I buy a domain name
for $8.95 a year, we can generally get away with deducting 100% of that on our
taxes for this year (IRS guidance is unclear and, hey, nobody cares about 30%
of $8.95). When you buy a domain name portfolio for $40 million, all of a
sudden the accountants get cautious about rules. One cautious treatment of
that purchase is to treat the $40 million as a capital investment and amortize
it over a period of years.

This is based on the assumption that capital improvements, like say a factory,
have a certain defined useful life, and that spreading out the cost over the
useful life of the capital improvement gives a better picture of the actual
state of the company.

The problem with amortization for domain names is that domain names don't
really have a useful life and, to the extent that they depreciate, they
depreciate negatively. The economics of large domain portfolios that are not
just garbage and virtually any developed domain means that the domain gets
_more_ valuable over time. They also can be maintained, indefinitely, for a
pittance per year.

What this means concretely for Demand Media is that when they buy a property
-- let's say SchmeeNow for $10 million based on their current revenue of $500k
a year -- they book 10 years of $1 million accounting charges. That will help
to decrease their apparent profits for the next 10 years, but in those years
the money will not be actually leaving their pockets (modulo quirky financing
deals which sometimes happen in the high-end domain market).

Software is dealt with in a similar fashion, although I think software tends
to be closer to factories in terms of having a measurable useful lifespan.

The above comment ignores Demand Media's single risk factor, which is that
there are probably a few dozen people in Mountain View which could, given
management approval, end their company with a mouse click.

~~~
quizbiz

        given management approval, end their company with a mouse click.
    

please explain

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btilly
If Google drops Demand Media from the search engine as spam, Demand Media is
dead.

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patio11
That is just the most obvious path, too. Not only is Google their traffic
lifeline, they are also their largest advertising customer. Merely "Smart
Pricing" eHow or turning off Youtube rev share for ExpertVillage would likely
also be fatal, or close to it. More broadly, any substantial opening into
Google search keyword data would put DM within striking range of any YC
startup sized company that wanted them -- search prediction is the only hard
part of the puzzle.

Luckily for DM, Google would switch all employees to Windows ME, code only in
BASIC, and sell out a million dissidents prior to allowing the world to
organize _their_ data.

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bemmu
Just a guess, but maybe with "profitable" they meant that if they stopped
acquiring sites and just ran with what they have now, they would be profitable
on that $200 million revenue. Instead they choose to put those profits right
back into growing their business.

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charlesju
This is getting ridiculous.

Demand Media is negative because they used their money to acquire perpetuities
(aka. cash-cow niche content sites). What do you think happens when they stop
acquiring sites?

Profits.

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aresant
The article answers the question:

"Adjusted to OIBDA - or adjusted operating income before depreciation and
amortization expense - show the company made $36.8 million in 2009"

As noted otherwise here on the board, they are profitable sans aquisitions and
related expenses.

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brown9-2
This is a pretty funny definition of profitable isn't it?

Sure, we're profitable, if you don't count a bunch of the money we spent this
year...

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aresant
If they would have been profitable without these assets as either a liability
or cash flow item on balance sheet - I think that counts as profitable.

Eg - If you're in the printing business and profit 500k but buy a 750k printer
that you don't need to be operationally profitable but will help you be MORE
profitable in future years - you lost money but you're still soundly
profitable

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gojomo
Happy to see these web polluters losing money; hope their IPO is pulled or
disappointing. Maybe Google can push an index update in the weeks before the
IPO that drops their traffic 50% or more? (No neutrality -- for SEO spablum.)

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bosch
Isn't this the shady company that is doing something similar to Jason
Calacanis' Mahlo? Mainly that they have machine generated pages designed to
return minimal data that returns high results in search engine rankings?

Once search engines optimize their algorithms to ignore these sites, won't the
money stop flowing?

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omarchowdhury
Does anyone know how to identify the niche content properties owned by Demand
Media?

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vaksel
google bribes?

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keyle
I'm thinking of filing an IPO. I mean, I'm more profitable than that, I
actually make money, and maybe I could make a lot more if I had some more.

Apparently, any person with some public credibility(?) can pull that off.

