Can Rupert Murdoch’s punt on The Daily really beat the cut-price content makers? Kohler

The other big media event in the United States last week, apart from Rupert Murdoch’s launch of the iPad-only publication The Daily, was the IPO of Demand Media.

In some ways Demand Media is The Daily‘s evil twin. Whereas The Daily is a lavish traditional media production and a wild, crazy attempt to recreate the newspaper model in digital form, Demand Media is the ultimate expression of the digital age, taken to its extreme.

Demand Media uses algorithms to predict what media consumers will search for and then pays between $15 and $20 each for items that will appear at the top of the Google search results. It is media by robot, suggesting topics to an army of 13,000 freelancers who then write articles or make videos at a furious rate, trying to make a living on the measly piece-work rates that Demand Media pays.

Last week the company went public and was promptly valued at $1.9 billion – more than the New York Times, and the most successful IPO since Google itself.

Part of its success relies on an accounting fiddle: it capitalises editorial costs over five years. That is, where other media companies expense costs as they are incurred, Demand Media takes only a fifth in each year into its costs. That’s based on the proposition that each article or video will have value for years because it will be available on websites for that long.

Apparently its IPO advisers – Goldman Sachs and Morgan Stanley – explained to the owners that they would get a better price if it were profitable, and it seems investors have swallowed this magic trick, for the time being.

That aside, it seems to be growing page views and revenue. According to the IPO documentation the company earned $US198 million in the year to December 31, 2009, and $179 million in the nine months to September last year. Page views numbered six billion for the latest nine month period, up 20% on a year ago, and revenue per thousand page views increased from $10.33 to $12.60.

The number of articles and videos published is not revealed, so we don’t know what they are making per item, but six billion page views in nine months represents about 22 million a day. Apparently their freelancers are churning out up to 10 items a day – a total of, say, 50,000 items a week (allowing for weekends and RDOs), which are therefore grabbing an average of perhaps a thousand page views per item.

Which means they’re paying the content producers about twice what they’re making on each item, which is why they have to capitalise the editorial costs over five years.

This is the less glamorous side of digital media – the Dickensian sweatshop. Here’s another example: last week the website Business Insider published a leaked slide presentation from AOL, entitled ‘The AOL Way: Content, Product, Media Engineering and Revenue Management’, which showed another example of the same thing.

The “AOL Way” is to increase “content production” from 33,661 “pieces of content” to 55,000 over the next three months and to decrease the average cost per “piece of content” from $99 to $84 while increasing the median page views per article from 1,512 to 7000. This will take the average gross margin from 35 to 50%.

Meanwhile Rupert Murdoch, being a traditional newspaperman, doesn’t care for such stuff. The Daily cost $30 million to build and the running costs total $26 million a year. A subscription costs $1 a week or $40 a year. Maybe there’s someone crunching the “pieces of content” numbers, but if so they’ll soon be carted off to the funny farm.

After commission to Apple and discounts, the break-even subscription rate is 750,000. Including the normal churn for iPad apps, The Daily will need to sell about one million copies of The Daily to make the barest of profits. According to Jeff Jarvis of the BuzzMachine blog, Wired magazine’s subscription app sells 22,000 a month, down from a debut of 31,000.

So The Daily will need to sell roughly 34 times the sales of Wired – but EVERY DAY, not once a month.

It’s unlikely that this is even remotely possible, but you’ve got to admire Murdoch for the grandness of vision. In a digital world of penny-pinching, piecework and “pieces of content”, he’s an old guy taking a big, old-fashioned media punt. I’m coming over all nostalgic and teary.

This article first appeared on Business Spectator.