Yahoo Takes A Gander At Demand Media To Plug Some Holes

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Gosh, How Many Diggs Does It Take To Get To The Home Page, Anyway?

Demand Media, founded by former Intermix Media (the parent company to MySpace) CEO Richard Rosenblatt, has quietly grown into a pretty large business, with rumored revenues of around $250 million, and profitable. It just so happens that what Demand Media is good at – generating lots of advertising impressions and creating niche social networks for media sites, may be a perfect fit for at least some of what ails Yahoo.

Which explains why Yahoo has approached Demand Media to acquire them in the last couple of weeks, say multiple sources close to the companies. The rumors started when someone spotted Yahoo’s new Head of U.S. Region Hilary Schneider leaving Demand Media’s offices in Santa Monica a couple of weeks ago. She was there, reportedly, to float the idea of an acquisition by the company, in the $1.5 – $2 billion range, say our sources. Scott Moore, who runs Yahoo’s content sites and is based in Southern California, has also reportedly been present at the meetings.

Demand Media, which refused to comment on this story, owns a large domain registrar called enom, which spins off a lot of parked pages (domains that are owned but do nothing but show advertisements). The ads that are shown on those pages are counted under the umbrella of “search marketing” and tend to generate very high fees. Demand uses both Yahoo and Google, but mostly Yahoo, for ads on those pages under a long term deal. When that deal is up, there’s a very good chance Google will win the business.

Demand also owns a number of large media sites, including ehow, trails and livestrong (along with dozens of others). All of these sites are heavy on content and generate a lot of page views and ad impressions. Demand Media also adds social networking features to those sites. They’ve historically used MySpace code to power the social networks, but have recently started to move over to Pluck’s social network product. Demand bought Pluck for a rumored $75 million earlier this year.

That means Demand nicely fills a number of holes in Yahoo’s current business. They have lots of ad impressions, including search impressions, to help Yahoo gain market share in those areas (and keep it away from Google). The vertical content sites fit into Yahoo’s strategy of owning content when it suits them. And the Pluck distributed social networking product also happens to fit squarely into Yahoo’s plans to build social into all things Yahoo.

The two companies have other connections as well. Goldman Sachs, which is Yahoo’s investment bank and has advised them all year on the Microsoft transaction, has invested $80 million or so in Demand Media (out of a total of $355 million raised). And Gordy Crawford, who owns a big chunk of Yahoo through Capital Research, is also a personal investor in Demand Media.

Our sources are saying Demand Media has rebuffed Yahoo’s advances so far, given the company’s uncertain future. And Rosenblatt reportedly is looking for more like $3 billion for his young but rapidly growing startup.

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