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Summary:

AOL’s core businesses are still declining rapidly, as shown by its quarterly earnings report today — and that disintegration includes the advertising business that CEO Tim Armstrong seems to be betting the company’s future on, if a leaked internal strategy document is anything to go by.

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AOL has been spending hundreds of millions of dollars on acquisitions aimed at boosting its content businesses, including the recent purchase of the GoViral video network and the addition of TechCrunch to its technology-content unit in September, but the company’s core businesses are still declining at a rapid pace — as shown by its latest quarterly earnings report, which saw double-digit drops in revenue and profitability. That disintegration includes the advertising business that CEO Tim Armstrong seems to be betting the company’s future on, if a leaked internal strategy document is anything to go by.

Advertising revenue in the latest quarter was down 29 percent, and subscription revenue fell by 23 percent, while the company’s overall revenues dropped by 26 percent compared with the same quarter the previous year, falling to $596 million. AOL’s full-year revenues were also down by 26 percent, to $2.4-billion. Operating cash flow — one of the core measures of a company’s health — also fell by 20 percent in the most recent period and was off by 35 percent for the full year.

Laying Track as Quickly as Possible

These double-digit declines in advertising are particularly crucial for the company because Armstrong is betting the farm on ad revenue as a future cash generator. In effect, he is trying to build a massive content-and-advertising business as quickly as possible, in order to replace the rapidly-disintegrating subscription and portal business that has been AOL’s legacy for the past decade. As Ken Auletta noted in a recent profile for The New Yorker, the company still brings in hundreds of millions of dollars in revenue from people with dial-up AOL accounts (many of which they no longer need), and that is providing the cash to try to build these new businesses via acquisition. But it’s like trying to lay track quickly enough so the train doesn’t go plummeting off a cliff.

A big part of that effort is generating massive amounts of content and then trying to monetize it via Google AdWords and other search-based advertising — at least according to a leaked strategy document. It’s not clear when the document was written, but it describes how the company is banking on increasing the number of stories it runs per month by more than 60 percent over the next four months, to 55,000, and hoping to increase the number of pageviews per story by more than 400 percent to 7,000. Writers at the company are expected to write between 5 and 10 stories per day, and story selection is to be driven by analyzing search traffic to see what kind of content people want to read about — exactly the same strategy taken by Demand Media.

The Red Queen and the Law of Diminishing Returns

The picture painted by these slides is an obvious one: AOL is trying to ramp up its content engine to Formula One speeds, even though some parts of that engine still aren’t even working properly, and other parts have been re-engineered completely. To take just one example, Armstrong has talked repeatedly over the past year about the company’s original content strategy, and AOL hired dozens of staff for its sports-blogging network Fanhouse — then a week ago, the company effectively sold off the division to competitor Sporting News and reportedly let go about 100 people. Obviously the division didn’t have what it took to meet AOL’s goals, but what happens when other divisions can’t meet those goals either?

The problem for AOL is the same one faced by Demand and other content “farms:” namely, the chasing of eyeballs and pageviews is a game of constantly diminishing returns. Producing thousands of posts or articles every day floods the web with masses of disposable content — and while that content might get picked up by Google’s search bots (although the search giant is doing its best to weed a lot of that out), it also drives down the advertising rates that companies like AOL and Demand are basing their future livelihoods on. It’s like the Red Queen’s race in Alice in Wonderland; you have to run twice as fast just to stay in the same place. Good luck with that, AOL.

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  1. Impulse Magazine Wednesday, February 2, 2011

    I can see this as being a constant theme as major corporations try to figure out different markets to enter into increase revenue

  2. The question is, how does one make money through online content? It isn’t easy. Do you put up pay walls? Do you crank out content? How is GigaOm doing? Are your white papers supporting the business?
    Perhaps micro-transactions? With small fractions of content costing ContentBucks.
    It simply is not easy and the person who cracks the code is going to be very, very rich. So far only Google has made money off the mass of content on the web.

    1. Game companies have already found the answer and are banking. It’s a matter of time until micro-transactions and online stores that supplement free content are the rule. This isn’t a sustainable plan either but it’s proven more profitable.

      The problem I see is McLuhan’s old dilemma. Content becomes so targeted and streamlined, that it becomes purely manufactured. That is almost the case now. I think they acquired HuffPo and handed media to Ariana is that she at least for a while seemed to attract and sustain organic content and growth, often without having to pay for it. That’s priceless, regardless of what the content is. In the end, though, integrity suffers once anything becomes “product.”

  3. Old Media:
    Business Value = Reader(subscription, eyeballs) * Demographics
    As more precise the Demographics as higher their value, hence small readership can be compensated with excellent Demographics. Anonymousness kills Demographics and therefor Business Value.

    Google:
    Business Value = Eyeballs * Intent
    Get many eyeballs guess search Intent, better Intent better business value and more eyeballs.

    AOL:
    Business Value = Eyeballs * ???
    Where ??? seems to be some imaginary statistical value without consideration of a decline in that value. But increase eyeballs by producing for Intent.

    Now if we trace back the origin of PageRank:
    How can one judge the quality of a scientific paper? The quick and dirty is to count the number of citations it got in other papers. Normalize it with the citations of papers it got stated in and one gets a pretty good understanding. Replace citations with links and one arrives at PageRank.

    What has PageRank to do with AOL? PageRank at it’s core depends on human judgment to link to quality(can have different meanings, subjective). Break it and organization based on links becomes useless. If content creation is not driven anymore by organizing data(for example,news in context) but based on intent, the feedback loop is closed and grinds to a halt. Content farms will kill Google and kill thereby themselves, at least as long as Google doesn’t change their assumption about quality. Which Google has and will do(how is the question), hence AOL (Content Farms) are doomed with their short lived analysis of intent to get to eyeballs.

  4. I think it’s time to stop using the term “content farm” — seems to me that “content factory” is more appropriate.

  5. AOL Chases Eyeballs as Core Advertising Business Disintegrates: Tech News and Analysis « – Thad Thoughts Wednesday, February 2, 2011

    [...] AOL Chases Eyeballs as Core Advertising Business Disintegrates: Tech News and Analysis «. Filed under Uncategorized You can leave a comment, or trackback from your own [...]

  6. As a once and future journalist, I’m cheering for AOL’s Patch.com to become profitable, and I’m a little bit surprised that it hasn’t. Patch is hyperlocal, which means most of its stories end up being exclusive, even though each individual story is likely interest only a small number of people. But it’s hard to profit from news because it’s open to competitors and easy to copy. I wonder if Patch has thought about mixing in value-added services like local social networks that would allow it to charge small subscription fees. I wonder if that would even be effective.

    I have similar questions about online music and video sales. Sure, iTunes and Amazon are raking in money now, but it seems like a new competitor enters the space every week. They’re going to have to make their delivery systems more unique and offer (more) value-added services like social networking … or something.

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    [...] Display advertising tanked during the last three months of 2010 – ironic since holiday season is viewed as one where brand advertisers open their checkbooks.  I wonder if adding more page views from HuffPo is only going to exacerbate these problems in the coming quarters. (Mathew Ingram wrote about AOL’s growing headaches earlier this month.) [...]

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    [...] is whether this Hollywood strategy is going to produce enough revenue to make a difference for AOL, a company that is still in fairly precarious financial shape: in the final quarter of last year, for example, revenue sank by 26 percent and advertising revenue [...]

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    [...] company. And advertising revenue at the company continues to decline at a fairly precipitous rate, dropping by almost 30 percent in the latest [...]

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