Hitch a ride on a search engine
By Richard Waters
Published: April 4 2007 17:27 | Last updated: April 4 2007 17:27
Off Santa Monica’s touristy Third Street Promenade, up a narrow flight of stairs, there is an unmistakable hustle in the air.
The ceiling of Richard Rosenblatt’s office has not yet been finished, and a clutch of investment bankers is waiting in the hallway for a meeting (probably a common occurrence, given that he raised $220m last year to build his latest internet start-up.)
This district of Los Angeles has become a centre for the new digital media industry, a place where technology from Silicon Valley, 350 miles to the north, mingles with the creative impulses of nearby Hollywood. It is no coincidence that Yahoo! moved its media arm here, or that Electronic Arts has built a games studio nearby.
The fast-talking Mr Rosenblatt, 37, is already a veteran of this world. The last company he headed, Intermix, was sold to Rupert Murdoch’s News Corp in 2005 for $650m, thanks to the success of one of its online subsidiaries that at the time was only just gaining wider attention: the social networking site MySpace.
He claims to have no regrets now about giving up an internet property that has since become a household word. Yet Mr Rosenblatt is itching to go one better than he did before.
For a would-be entrepreneur, there is a paradox to the digital revolution under way in the media business. On the one hand, the barriers to entry have collapsed. It has never been this easy for anyone with a good idea to find an instant audience. Given the sizeable fixed costs involved in setting up a large-scale operation, however, this is an industry where big money is starting to count.
Mr Rosenblatt’s company, Demand Media, exhibits both sides of this conundrum. Starting with a clean sheet of paper, he and his business partner Shawn Colo, a veteran of private equity, have set out to build a new media company that is tailor-made for the era of Google and MySpace.
Any media business, says Mr Rosenblatt, needs three things: content, an audience, and a way to cash in on that audience. The trick is to find a free – or at least extremely low-cost – way to do each of these things.
Take the way Demand sets out to attract an audience. Some of its cash has been spent on acquiring digital assets that have a good chance of attracting the casual web surfer. That includes buying generic domain names – such as Gardening.com – that internet users are likely to type directly into the address bar of their Web browser.
A second approach relies on “natural” search – the free listings that Google and other search engines return in response to a query. Demand has bought up sites that stand a good chance of figuring high in the results. They include eHow, a collection of tips written by professionals that is targeted at search engine users.
To make money from this audience, Demand relies entirely on plugging into Google’s AdSense system. This places contextually relevant advertisements on other companies’ websites in return for a cut of any money earned, relieving companies such as Demand of the need to employ their own salesforce.
Content, the third element, is a work in progress. On some of Demand’s sites, the adverts from Google are the only content. Flashgames.com, for instance, is a website that exists purely to draw users to Google ads. Users who go to the site find a collection of links to other games sites: a click on any of these earns the company a fee.
“That little domain makes $200,000 a year profit and does nothing,” says Mr Rosenblatt. “It just sits there.”
That is the starting point. Adding other types of content to keep users on the site longer, or recommend it to their friends, could eventually increase the audience and advertising yield. From his experience with MySpace, as well as earlier internet ventures, Mr Rosenblatt is clear about the cheapest way to do this: give people the tools to create the content themselves.
It all sounds like a highly opportunistic and low-risk recipe for turning a profit. Yet perfecting this system takes big money. Partly that is because it relies on the sort of leverage that comes only from being able to aggregate a large amount of internet traffic.
“The bigger you are, the more attention you get from the search engines. They want to do big deals,” says Mr Rosenblatt. The little guy simply can’t bargain for the same sort of revenue share when it comes to negotiating an advertising deal. Also, size helps to justify the large fixed investments in infrastructure, expertise and technology needed to run an internet company like this.
“We think, right now, scale is important,” says Mr Rosenblatt. That is one of the lessons from MySpace: without the backing of a big parent like News Corp, he says, MySpace could never have afforded the investment needed to grow so quickly.
Scale also brings something else: a deeper knowledge of user behaviour, and the value of internet content, that can be used to perfect an online business model. With what Mr Rosenblatt claims are 9m domain names and 15m-20m unique monthly visitors, his company is in a position to analyse usage patterns and financial returns across many different websites.
“You can predict the ROI [return on investment] on a piece of content,” he says, and make smarter decisions about when to invest in extra content to attract an audience.
The model, however, is not without risk. Relying on natural search to generate an audience leaves a company dependent on the methods that popular search engines use to rank their results. These can change abruptly as search engines act to prevent websites “gaming” their systems, creating unpredictable changes in the search rankings.
Also, without their own sales forces, Demand’s reliance on the advertising networks of Google and others gives it less control over their revenue-generating capability. And because it amasses a large audience by drawing together many specialised ones – what is known on the internet as the “long tail” – it probably has no other option.
“For most of the ‘long tail’, you need to give up your advertising to a Google or a Yahoo,” says Mr Rosenblatt.
When personal gets vertical
It all sounds so 1999. In the first dotcom boom, there was much talk of “vortals” – short for “vertical portals”, or specialised gateways to the internet that would draw an audience of people who shared a common passion. The language of the Web 2.0 boom may be different, but it appears that some ideas don’t change.
“I think social networks and communities will become more personal and more vertical,” says Richard Rosenblatt, chief executive of Demand Media.
In other words, sites such as MySpace have benefited from the new passion for social networking, but this audience will fragment as internet users congregate around online services that reflect their particular interests, whether that is gardening or kayaking.
Mr Rosenblatt has licensed back some of the social networking technology that, as chairman of Intermix, he sold to News Corp, and is now working to graft that on to the specialised websites that Demand has assembled. If all goes to plan, for instance, users of eHow will later this month be able to post their own advice on the site and find related tips written by friends or others who share their interests.
The next step, says Mr Rosenblatt, will be personal portals that are even more closely tuned to each user’s interests. To that end, Demand has licensed the “.tv” domain and is building a service to let internet users run their own personal video portals.
“People will want their own vertical, and their own personal space,” says Mr Rosenblatt.
Copyright The Financial Times Limited 2007