Demand’s Creative Accounting

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money_small.jpgADOTAS – A couple of months ago, it seemed Demand Media was about to give Wall Street an IPO just in time for the holidays, but alas, All Things D’s Kara Swisher discovered that we’ll have to wait for the new year as the content engine just delivered the Securities Exchange Commission an amended S-1 filing further explaining its accounting procedures for expensing content production. Interestingly, the company that barrages the Internet with a storm of low-cost and low-quality content apparently has some rather creative accounting methods.

Because its primarily instructional videos and the like, Demand argues the majority of its content is evergreen, and thus the company amortize content creation costs over five years through some interesting calculations.

In Demand’s own words:

“Capitalized media content is amortized on a straight-line basis over five years, representing the Company’s estimate of the pattern that the underlying economic benefits are expected to be realized and based on its estimates of the projected cash flows from advertising revenues expected to be generated by the deployment of its content. These estimates are based on the Company’s plans and projections, comparison of the economic returns generated by its content of comparable quality and an analysis of historical cash flows generated by that content to date.”

Growling about Demand Media’s content farming has almost become a pastime of the tech media, so reaction to these accounting methods has been the equivalent of thousands yelling “BS” into an infinite number of megaphones.

Business Insider’s Henry Blodgett sums it up best: “[L]et’s say a particularly productive Demand Media writer earns $100,000 a year… Instead of taking the writer’s compensation as a $100,000 expense in the year in which the writer is paid, Demand Media expenses only $20,000. Then it expenses another $20,000 in each year for the next four years. This has a marvelous impact on the bottom line.”

Demand was shooting to push out an IPO fast as can be, raising $125 million for a reported $1.5 billion valuation. However, this is the second amended filing Demand has entered in the last few months — perhaps the more that comes to light about its accounting, the less promising an IPO will be….

5 COMMENTS

  1. I’m not an accountant but the method explained above seems quite sane and logical to me. Demand Media’s business model is based on cumulative profits over a period of time. I don’t see anything wrong with how they’ve explained their amortization.

    Demand Media is one of the smartest developers and users of technology on the Internet. They get it. While others are spending millions trying to figure out what consumers want, Demand uses the simplest free tools and gets the truth. And although some writing purists may criticize their content, I’ve received many answers that I was seeking from their articles without all the stupid fluff that many “professional writers and editors” add.

    To me, Demand Media articles are very simple and direct answers to simple direct questions and there’s nothing wrong with that.

    They’re a smart bunch of people in my book.

  2. I’m not convinced that ALL of their content is “evergreen.” Their eHow site holds a ton of dated content. For examples, “How to Replace a Floppy Disk Drive” and “How to Troubleshoot a 1982 Ford Ignition Coil.” I highly doubt these pieces of content will be highly profitable or even profitable within five years. I think Demand Media is overestimating its online content. In this day and age, the Web trends change with warp speed. Good try, Demand … but no dice.

  3. Man the toads in their little writer cages are really ganging up on DM.

    I get that they amortize writing costs across 5 years. That’s not that unusual as an accounting practice, but Demands use of it is novel. But I can’t help but think that the writers of these hit pieces are upset at DM for paying shit wages to writers. It clearly seems to be a heard mentality.

    Not once is this or the other pieces I have “read”, does anyone mention that this is not a new practice. Amortizing capital costs or expenses is an ages old practice. That said if I buy an oven for my restaurant, I can safely say that it will be here for as long as my business is or for example 5 years. An evergreen articles has no material value and there also is no guarantee that any article indexed by the search engines will in fact stay there and continue to produce traffic years down the line.

    But I believe Demand when they say that their data shows that in fact that’s the way it has worked for them. The truth lies in the numbers and not the strategy I suppose.

  4. DM’s accounting is not as creative as their scam to clone their entire eHow site and call it “eHow UK,” including writer-owned articles that DM claimed they couldn’t pay for since the site was “International.” The “UK” site was (and presumably still is) hosted in the US. After an uproar in late 2009, DM claimed they would remove those stolen articles. They made the writer-owned articles invisible for a few months, and now they’re back again, with no compensation for the writers. What is the purpose of an entire site full of millions of duplicate articles? And not only is it duplicate content, but Google indexes thousands of their pages comprised solely of useless comments, separated from the articles they refer to. Utterly useless content. Richard Rosenblatt is out to scam investors. Again.

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