Business analyst Mark Lacter joins KPCC once a week for an in-depth look at economic issues in Southern California.
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The battle over Bratz; Demand Media goes public

KPCC business analyst Mark Lacter talks about the battle over who owns the Bratz dolls; he also talks about Southland-based internet company that's gone public and created a stir.

Steve Julian: On Tuesdays we talk about the latest business stories with Mark Lacter. Mark, the toy company Mattel keeps trying to add Bratz dolls to its lineup. Will it ever end?

Mark Lacter: Good question. You might remember Mattel winning a $100 million jury award a couple of years back in a copyright infringement case brought against a company called MGA Entertainment (based in Van Nuys). The claim was that the fellow who came up with the idea for the dolls had been working for Mattel - and so Mattel, which is based in El Segundo, should have rights to the Bratz product line. But a federal appeals court overturned the original decision and ordered a retrial, which got started a couple of weeks ago in Santa Ana and will probably drag out for another four or five months. And it's going to include all kinds of sensational allegations by both sides - MGA says that Mattel threatened distributors that did business with the company (they even claim that Mattel tried to buy up excess doll hair to push MGA out of business).

Julian: And Mattel claims...?

Lacter: Mattel says that MGA tried to steal trade secrets by infiltrating its operations. Whoever loses the retrial is probably going to appeal, which means more legal limbo. And it does make you wonder why the two companies are pursuing this case rather than settling out of court - that's normally what happens when companies squabble. Well, maybe you can understand MGA's motivation - it's a fairly small toymaker, and Bratz remains an important part of the business.

Julian: But why on earth is Mattel still at this, considering that the Bratz dolls aren't nearly as popular as they used to be?

Lacter: And also considering that the time and money invested in this case have been enormous. Well, Mattel does have a history of litigiousness, especially over copyright claims, and what we're seeing could be another example of that tenacity - and also of two companies that obviously can't stand each other.

Julian: And another local company goes public ...

Lacter: That’s right – you might not be familiar with the name Demand Media, but many of us have seen the articles it posts on the Internet. Such as telling people how to brush their teeth or how to buy beer, or my personal favorite, how to put on a Speedo. Demand Media is based in Santa Monica (it has several hundred employees locally) and its stock price took off in the first day or two of trading - so much, in fact, that Demand Media has a higher market value than the New York Times Co.

Julian: Excuse me?

Lacter: Yeah, it's really a throwback to the late 90s when investors were placing all kinds of outrageous valuations on Internet companies that weren't making any money, and in some cases barely had a business plan going. Well, Demand Media does have a business plan - it manages to get near the top of search engine results by supplying all those explanatory articles - and that's boosted ad revenues. But profitability is based on a little creative accounting - namely spreading the costs of producing all that content over several years. If you spread costs, your bottom line improves.

Julian: Does this company have a real future?

Lacter: Most likely, yes. The question is whether articles on brushing your teeth make it worth $1.6 billion? Pretty unlikely. In fairness, Demand Media is a little like the major social networking sites, at least in terms of trying to value what they do. These companies don’t really offer a product, but more of a service, and an untraditional service at that. And even assuming that ad revenues come streaming in, are they going to be high enough to warrant whatever inflated price they're traded at on the stock market? That's the big question for investors – and, Steve, I doubt they'll find the answer on any of the Demand Media sites.

Julian: Mark Lacter is a contributing writer for Los Angeles Magazine and writes business blogs at LA and at