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Demand Media hurt by search changes at Google

By Jennifer Saba

(Reuters) - Demand Media said on Thursday that a drop in search engine referrals and weak advertising sales sent its revenue down for the first time since the company made its public debut nearly three years ago.

Demand Media, which owns the websites eHow, LiveStrong and Cracked, mainly makes its money from articles and videos that surface high in search results. Its other line of business maintains top-level generic web domain names like ".actor" and ".social."

"There are challenges we are facing," said Chief Financial Officer Mel Tang. "Our content media business is still a very good platform. We are going to invest in areas of growth."

Founded in 2006, Demand Media was a closely watched experiment in how to create inexpensive content by tapping a network of thousands of freelancers for "how to" videos and articles. The content is designed to show up high in search results capitalizing on advertisers looking to place their dollars on popular articles and videos.

The problem with Demand's business model is that it is too dependent on Google. Over the past couple of years, Google has made several changes to its search algorithm specifically to weed out what it considers low-quality content.

This hurt Demand because some of its articles and videos were pushed down in search results, which in turn lowered its advertising revenue.

For the third quarter, Demand reported a 2 percent drop in total revenue to $96.3 million because of weakness at its media properties.

Its registrar business, which Demand plans to spin off, reported an 11 percent rise in revenue to $37.7 million. Revenue at the content and media division fell 7 percent to $57.7 million excluding traffic acquisition costs.

The company's co-founder, chief executive, chairman and ambassador to Wall Street, Richard Rosenblatt, left abruptly in October and Demand is currently searching for a permanent CEO.

Interim CEO Shawn Colo said the company is still searching for Rosenblatt's successor and has retained Spencer Stuart. The search for the top job has become Demand's priority even as it prepares to separate its registrar business.

Demand Media earlier this week said that Taryn Naidu, currently the company's executive vice president of domain services, was appointed chief executive and director of the newly named Rightside Group.

The company reported a net loss of $10.4 million or 12 cents a share compared with a gain of $3.2 million or 4 cents a share in the same period a year ago.

(Reporting by Jennifer Saba in New York; Editing by Grant McCool and Eric Walsh)

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