Feb. 24, 2011, was a fateful day in the fairy tale otherwise known as the ascension of Demand Media Inc. (NYSE:DMD). On an innocuous Thursday evening, Google Fellow Amit Singhal and Principal Engineer Matt Cutts released a blog post detailing an algorithmic change going on behind the scenes of the world’s largest search engine.

“In the last day or so we launched a pretty big algorithmic improvement to our ranking — a change that noticeably impacts 11.8% of our queries — and we wanted to let people know what’s going on,” Singhal and Cutts wrote. “This update is designed to reduce rankings for low-quality sites — sites which are low-value … (sites that) copy content from other websites or sites that are just not very useful.”

The release, which was codenamed Panda, has been widely viewed as an attempt to weed out articles produced by “content farms.” Namely, companies that pay freelance writers small sums to crank out large amounts of content that can then be published online and surrounded by lucrative advertisements. That is, in essence, Demand Media’s business model, as well as the model used by Demand’s competitors; companies like Yahoo! Inc.’s (NASDAQ:YHOO) Associated Content, Examiner.com and Ask.com.

Demand Media, though, has to be the most successful example of content farming to date. Last year, the company was cranking out as many as 1 million articles a month at a cost of up to $15 an article for publication on eHow.com, Livestrong.com and several other sister sites.

As word of Google’s “Panda” update spread, investors dumped Demand Media’s shares, pushing them down more than 20 percent since Feb. 24. That’s roughly the same percentage decline the company experienced in pageviews with search engine referrals for eHow dropping 20 percent (per Reuters) and total page views falling 12 percent.

“Let me be clear, this was a real impact to our business and we take it very seriously,” Rosenblatt said during the company’s conference call. Nonetheless, DMD still surprised analysts to the upside with a strong Q1 earnings report late last week. All told, they brought in $0.06 per share (excluding one-time fees) compared to estimates of $0.04 per share.

Demand Media changing its focus

What’s more important than current earnings, though, is what’s going to happen to the company’s search results moving forward. Demand appears to have heard Google’s warning shot loud and clear. The company’s made a number of dramatic changes to its business model, including:

1) Cleaning up shop. Demand Media has abandoned a program that let anyone publish on eHow.com, and they’re deleting some of their less valuable articles on the site. They’ve also re-designed eHow’s pages and created a “Helpful?” tab (shown at left) that gives readers the ability to provide Demand with feedback on an article’s quality.

2) In-depth features. Rather than paying Demand Media freelancers a flat $10 to $15 per article, they’re honing in on true experts in each respective field and asking them to write longer, more involved feature articles of roughly 850 words. Pay could go as high as $350 per piece. Recent online job postings by Demand have been looking for business writers who have degrees in business, finance, or law, and “extensive experience in business writing” (per WebProNews). That’s a far cry from the good ol’ days when anyone with a Web connection and a decent grasp of the English language was free to pen articles for eHow.com.

3) Brand new partnerships. Hand-in-hand with their push to create more valuable content, Demand’s hired two celebrities to help launch new, flagship content on their sites. The first, typeF.com, is a fashion and beauty site driven by Tyra Banks, and the second, a mini food site by Rachael Ray will appear on eHow.

4) Diversification. In March, Demand Media acquired CoveritLive.com – an online company that lets writers and news outlets create live online chat rooms where fans, readers and celebrities can interact with one another during major events from the NFL draft to fashion shows and international chess tournaments. CoverItLive offers a free ad-supported version of its software and a premium, ad-free version for marquee clients like ESPN and the BBC. The move helps Demand Media diversify away from its reliance on articles as the primary means of delivering ads. Expect more acquisitions in the months and years to come.

Fred’s Best Guess: Demand Media isn’t going to be bankrupt by an algorithm change at Google. The fact of the matter is, Demand Media makes a whole hell of a lot of money for Google, too, as it splits revenue with the search engine company for the ads it runs on many of its pages. While Google doesn’t show preference to Web sites that run Google ads, Google has a mandate to provide relevant search results no matter what users type into the search engine.

In many cases, Demand Media results are the highest quality results for more obscure searches. That’s simply by virtue of the fact that the company’s been churning out niches articles for years. Last year, it spit out the equivalent of more than four English-language Wikipedias. Some of those articles are great and some of them are going to end up in the trash bin.

So long as Demand Media sticks to its plan to make more compelling articles its primary focus moving forward, that 12 percent drop in traffic will look like a minor speed bump in the years to come, and we could truly be witnessing the birth of a new, international publishing superpower. No one wants to admit that, but in the world of online publishing, text is a commodity, and Demand Media has as much of that commodity as anyone.

Related