How does Demand Media make money?

Demand Media the majority of its money from service fees, including advertising and subscriptions

It's not a revelation to say that the Internet has changed the way we consume, well, everything from television, to movies and even news. The change from 2004 to 2014 in terms of what we watch, read and listen to, and where, is startling.

It has also fundamentally changed the way content is presented to us. Think about BuzzFeed, for example, with its lists and cat memes and quizzes. It's a brand new way to give us the same news we always got, but in a form that we have never seen before.

One company that was been on the forefront of that revolution is content and social media company Demand Media, which operates online brands Livestrong.com, Cracked and eHow, saying its mission is to "connect brands with people and people with brands."

When it launched, Demand had a compelling value proposition: It would attract visitors through search engine optimization. Articles would be written based on popular searches. If people were searching, it had to meand there's demand for that content. Hence the term "demand." This became a challenge when Google changed the way it ranked stories.  

So how does a content creation company like Demand Media make money? There are two ways: through service revenue and product revenue.

Service revenue streams

Demand Media's service revenue consists of multiple sub-streams:

• Advertising revenue, which is performance-based. Advertisers pay on a cost-per-click basis, which means that they pays only when a user clicks on an ad.

The company also makes money from fees generated by users viewing third-party website banners and text-link advertisements, as well as those generated by enabling customer leads or registrations for partners; and fees from referring users to, or from users making purchases on, sponsors’ websites.

• Subscription services, or membership fees paid to access content available on its websites.  

For example, a Gold Membership on Livestrong.com costs $45 for a year, and gives members access to the  "Dare to Lose Twice the Weight" group.

• Domain name registration service fees, which are charged to third parties in connection with new, renewed and transferred domain name registrations.

• Value added services, such as security certificates, domain name identification protection, charges associated with alternative payment methodologies, and web hosting services.

• Auction service revenue, which proceeds received from selling domain names from Demand Media's portfolio, along with proceeds received from selling domain names that are not renewed by customers of its registrar platform.

Product revenue

Starting this year, Demand Media has begun to separately report product sales and cost of products,as a result of its purchase of Society6 in June 2013. 

Society6 is an online marketplace for artists to make their work available for sale as a variety of products, including art prints, wall clocks, mugs, shower curtains, hoodies, and iPhone cases.

Of the two, revenue streams, service revenue is is far and away the bigger money maker for the company, taking in over $83 million in the second quarter of 2014. In comparison, product revenue only brought in $6.6 million.

Due primarily to service costs, which totaled over $51 million for the quarter, Demand Media saw a net loss of $14.3 million in its latest earnings report. 

More about Demand Media

The company went public in 2011, raising $151 million, and sported a valuation of $1.5 billion. It generated XXXX in revenue in 2011. Before its IPO, it had raised $355 million from investors that included Goldman Sachs, 3i Group, Generation Partners, Oak Investment Partners, Spectrum Equity. Today, Demand has a market cap of $169.24 million.

Its valuation made it the second biggest exit of an LA-based company in the last ten years. 

VatorNews reached out to Demand Media for more information. We will update if we learn more. 

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(Image source: demandmedia.com)