UPDATED 12:15 EDT / JANUARY 12 2011

Demand Media IPO Brings SEC Scrutiny, Industry Curiosity

demand-media-logo California based Demand Media just came out with their IPO showing 4,500,000 shares estimated between $14.00 and $16.00. With this valuation, their IPO should become a gigantic windfall for the corporation; if the average price per stock falls between those expected values they’ll make at least $58.1 million. All this is brilliant and good for the media content company, but what really makes this IPO particularly curious happens to be the way that they’re reporting their costs in regards to creating content.

According to an article outlining this posted on All Things D,

One bump came last month, as BoomTown reported after the Santa Monica, Calif. company had to satisfy government regulatory questions over the way it recognizes costs of creating content.

Currently, using a concept of “long-lived” content, Demand has been amortizing those expenses over five years, since it says it continues to generate revenue on that material over that much time. Most publishers recognize costs immediately.

That’s different from many companies in the publishing business, which typically account for costs of creating content immediately as they are incurred or over a much shorter time period.

Demand has determined that its content has a more evergreen nature, compared to more topical–and perishable, from a revenue point of view–material produced by others.

Obviously, since this accounting treatment results in more attractive financial results, the longer expense period is of great interest to many other online content creators–such as AOL and Yahoo–which are watching the Demand IPO closely.

It’s not uncommon for content producers to recognize a sort of long-tail to the lifecycle of content. This is especially true when it comes to print media and even digital media, which can continue to produce residuals over the entire lifetime of its copyright. However, most of the money made form such products does happen within very few years (or months) of the initial publication. Most content publishers make up both costs and expected revenue up front, whereas Demand intends to amortize costs over five years.

Or, the timeline that they expect to make the bulk of the residuals from their content.

According to the article, the SEC required Demand to amend their IPO application to include information about their accounting procedures. “To be allowed to expense over five years, Demand said, the company has to use a sophisticated algorithmic platform–which other content creators do not have–to provide proof of ‘probable economic benefits’ from that content over that time.” And they included that they would regularly review performance of published content for costs and residuals and a few other caveats.

The SEC—and the rest of the industry—will primarily be interested in that Demand Media is not hoodwinking its investors with this innovative approach to content cost and residual reporting and that their model accurately reflects their capability to deliver. To the SEC, the promises made to investors; whereas to the rest of the content publishing industry, it’s the efficacy of this model for capital gains and gathering up investors.

If Demand Media manages this well, we might see a alteration in the investment paradigm for the content industry.

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