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Summary:

AOL dropped a late night bomb – it bought The Huffington Post for $315 million – of which $300 million is in cash. But when you get over the initial ka-pow reaction, and start thinking about the deal, not everything adds-up. Here is my breakdown of the deal.

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Just when you thought you could finally put Superbowl commercials behind you and go to bed in a beer-induced slumber, AOL dropped a late-night bomb: it bought The Huffington Post for $315 million, of which $300 million is in cash. My first reaction –- wow! I had called for HuffPo being acquired by MSNBC before the end of 2011. But then those are the perils of the prediction game. The acquisition is not a surprise, considering AOL has been on a buyout rampage.

“Our strategy is to invest in as many brands as we can: brands that cut across devices and distribution channels,” AOL CEO Tim Armstrong told me in a conversation last year, “We will use M&A if we believe that is what is needed and it helps us get brands and helps expand our platforms.” HuffPo buyout is just that. Or what my dear friend Pip Coburn (an investor) would call yet another CEO promise of future bliss.

But when you get over the initial ka-pow reaction and start thinking about the deal, not everything adds up. Here is my breakdown of the deal.

1. The Return of The Eyeballs

First AOL snapped up our friends at Techcrunch. Now they have acquired Huffington Post. In between those two events Demand Media went public and is now valued at around $1.6 billion, about $800 million shy of AOL, which is valued at $2.4 billion.

Of course, there was also Yahoo buying Associated Content and Newsweek merging with the Daily Beast, but let’s leave them to their own devices for a moment. AOL has also bought other eyeball-centric companies such as GoViral. These deals are a clear indication that as more and more ad dollars shift to the web -– $28.5 billion in Internet advertising in 2011 –- the eyeballs and (by extension) page views are getting attention in the marketplace.

It wouldn’t surprise me to see more such quick-let’s-add-some-page-views-to-our-arsenal deals.  It wouldn’t surprise me to see Huffington Post’s main — and perhaps better — rival, Politco, get acquired over the next twelve months. I would predict MSNBC as a likely candidate to acquire them.

2. Arianna Goes To The Bank. Laughing!

Huffington Post was valued between $300 million to $450 million in 2010, according to Bloomberg. In that story that ran on December 14, Huffington said: “It’s working. Everybody’s happy with how it’s going. Nobody is in a hurry to cash out.” Ironic, considering that was around the time Armstrong was trying to buy the company.

For Huffington and her partner and investors, this is a sweet deal. Why? Because they are selling at the top of the market! The Huffington Post (and TV political commentators such as MSNBC’s Keith Olbermann) tasted success during a special kind of political climate, just as their rivals Fox and its commentators. The political (and economic) mood in the country is vastly different now, and who knows if the Huffington Post can keep up the momentum.

The numbers tell a part of the story. Quantcast, which measures the Huffington Post’s traffic, says it gets about 40 million people a month, and over past six months it has slowly been gaining a new audience, but has seen its page views drop from 600 million a month to 437 million in January 2011. The page views per person have declined by half. Even monthly visits per person are trending down. (update: see below)

According to some estimates, HuffPo did $31 million in revenues for 2010. At 500 million pageviews a month, the company is bringing in a little more than a $1 per user per year. Arianna did the best thing – locked in her profits.  What more, she gets to be the editorial figurehead for the new American Media Company.

3. For Armstrong, No Time To Lose

Tim Armstrong, AOL’s CEO has little or no choice but to make this and more bold moves. His company is racing against time. He has articulated a very content-centric strategy. In a recent article in The New Yorker (subscription required), Armstrong pointed out that since the Internet was a chaotic place, AOL would prove to be the filter and provide information that was crafted by its editorial production line. I use the phrase editorial production line mostly because a recently leaked AOL internal strategy document is all about journalism on a low budget.

He wants AOL home page to be the start page for information, but unfortunately it is not going to happen – the world of today doesn’t work that way. People have their favorites and start their news day at random places. And then there is the whole Patch effort to rule the local market – which apparently loses about $30 million a quarter and they are about to ramp-up spending on Patch sites from $75 million a year to $160 million a year. Guess how that is going to work out.

AOL’s moves are much like the ending scene from Butch Cassidy and The Sundance Kid. Surrounded by the Bolivian Army, Dos Hombres have no choice to make a gallant dash to their horses, guns blazing, hoping against hope as thousand guns blaze around them. The ever-increasing web inventory is like the Bolivian Army firing on AOL and others who have not yet come to terms with the futility of chasing page views.

Despite what you might read in the newspapers and blogs, AOL is still in A-O-Hell. In the most recent quarter, the company saw its advertising revenues go down 29 percent, at a time when online advertising grew about 14 percent. According to eMarketer, its share of total online display advertising was down to 5.3 percent in 2010 from 6.8 percent in 2009.

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.)

In a chat with The New York Times, charming and always quotable Armstrong quipped “I think this is going to be a situation where 1 plus 1 equals 11.”

Let’s not get ahead of ourselves, for in this case one plus one ends up equaling none – as we might soon see!

Update: In an email, Mario Ruiz a spokesperson for HuffPo argued that it was Quantcast that was making a mistake when it came to monthly pageviews and that there were two different views into the monthly pageviews. I am investigation this weird situation further. In the interim, here is a graphic HuffPo shared with me.

Related GigaOM Pro content (sub req’d):

  1. Brilliant there in your final flourish. “Desperate” is the word that came to my mind. On “Guess how that is going to work out” – I saw this movie once before. Disney started a portal/content network called GO in the late ’90s, at the dot-boom peak. I was part of it for more than a year. Helped them burn a BILLION dollars before the original-content-channels network was shut down, 400 of us laid off, and it all went to automated repurposing of other Disney content. Talk about mistakes that are hard to extricate yourself from … note the Disney sites that are still on the “go.com” domain, to this day. Why, in fact, if we consult the history books, we’ve just passed the 10th anniversary of that debacle.
    http://articles.latimes.com/2001/jan/30/business/fi-18700

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    1. Tracy,

      I am working on a follow up post as well. I think you are right — this is some of that thinking that has come into play, though I think on a larger canvas.

      As Einstein once said: “We can’t solve problems by using the same kind of thinking we used when we created them.”

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      1. No, but we can take advantage of the same structural flaws time and again to personally benefit at the expense of social value.

        You just have to marvel at the market harvesting machinery that is AOL… the profiteering continues!

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  2. [...] to pay $315 million for Huffington PostUSA TodayLos Angeles Times -Wall Street Journal -GigaOmall 651 news [...]

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  3. Sorry, I don’t find your argument at all persuasive and in fact, it’s a bit contradictory.

    You say AOL is “buying eyeballs,” but then say that page views at Huffington Post are declining. You say that Arianna got a sweet deal, but then submit that the valuation was well within the range of what analysts predicted.

    I, for one, certainly don’t know what Huffington Post should be valued at, but I do know that it has something to do with discounted future earnings based on reasonable assumptions.

    Reportedly, the site expects to take in $100 million next year. Assuming a quite reasonable 20% margin, that would mean AOL is getting a great property for about 15x forward PE.

    Again, I’m not at all certain that is the case, but simply assuming Tim Armstrong (by all accounts a very smart guy) is making a “gallant dash to their horses” is jumping the gun a bit (pardon the mixed metaphor).

    One thing is interesting. Despite the eye-popping valuations, it seems to be reasonably easy to find strong financial justification for them. I worked the numbers a bit for Facebook, and $50 billion actually looks cheap:

    http://www.digitaltonto.com/2011/why-facebook-may-really-be-worth-50-billion/

    Since I wrote it, the reported numbers have actually improved on my initial assumptions.

    So, I wouldn’t be so certain that AOL “bought at the top.” I’m sure valuations will eventually get out of hand, but we’re still near the bottom of the cycle and prices will rise considerably from here.

    – Greg

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    1. Greg

      If things were going swimmingly well, wouldn’t the company sell at the top of the range of its valuation versus the lower end of the valuation. I don’t think my argument is contrary. What I am saying is pretty simple_ eyeballs are in vogue again, arianna is happy she is getting $300 million and chance for her site which is seeing declining viewership and essentially she wins because AOL has a flawed strategy which is extremely near term. As for AOL jumping the gun — just look at their advertising sales. This is a company that has failed to monetize its current page views, so how are they going to monetize what they are buying now.

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      1. Okay, but even conceding all of those points. That Arianna was hot to sell, that AOL has a flawed strategy and is performing extremely poorly, none of that means that it’s not a good deal.

        I don’t have any inside knowledge of financials of HuffPo, but if the $100 million figure is even close to accurate, it looks like it makes a lot of sense.

        Moreover, HuffPo isn’t mere “eyeballs,” but pretty valuable inventory.

        As for selling near the bottom of the valuation, it’s tough to say, without seeing the employment contract. The deal was almost 100% cash and it’s safe to assume that Ariana will get a sweet options package.

        – Greg

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      2. And in reality, their daily battles are with the Daily Beast as much as Politico. In a sense, why all three are ramping up hires at the content creation end of the process.

        I think they’re less concerned with numbers from the last quarter – which didn’t even get it that January retail sales would exceed December for practically the first time on the planet – than what they may achieve with advertising marching out of the Great Recession.

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    2. Greg

      They are getting about $1 per user per month — not very valuable inventory. Secondly, they are going to have to spend on content — all those free articles are not going to continue forever.

      I am just highly skeptical of this deal.

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      1. That’s true, but they just got their sales team in place. News content usually sells for pretty good rates.

        Anyway, time will tell…

        Thanks for a thought provoking post and a great discussion.

        – Greg

        – Greg

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  4. You bring up some very insightful points (as usual), Om. But I’m not sure I agree with you entirely on this one. Look at the high level goal for AOL – selling premium display advertising against content. Huffpo has the brand, the content width and depth and People Magazine, The Economist, Wall Street Journal etc, are not exactly for sale…2

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    1. I think if you look at $1 a month per user, HuffPo is no Economist or WSJ or People magazine. It is essentially a content factory with some nice products. Sort of like K-Mart with Martha Stewart line-up of products.

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      1. I am not even sure I would refer to it as a “content factory”. The bulk of the site is aggregated content from 3rd parties, followed by a slew of link-bait articles and a sliver of original content (created by unpaid contributors).

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  5. I am not smart enough to speak to the pricing side of the equation, but strategically, I think that this is very smart. AOL is looking for cheap content meets relevance and integration, and Huffington Post is it.

    For a lot of people (myself included) Huffington Post is part of their daily online travels. It certainly doesn’t take the place of the best that the blogosphere has to offer, but then again, it doesn’t need to. It’s utilitarian and fun.

    It has the potential to be the CNN of the online era, I think.

    Just because Yahoo, lacked the culture to execute a unified content and services value proposition, doesn’t mean that the idea has no merits.

    Nor is it a given that Huffington herself aspires to ride off into the sunset. Given Armstrong credit, he has brought some good, strong people into his staple.

    Whether he can execute against that, remains to be seen. AOL has always been a story of, “Can he get the plane to take off before it runs out of gas (i.e., the legacy business).”

    Cheers,

    Mark

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  6. Who cares…

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    1. That’s what I thought. All this journalism about journalism, replies to replies. In an era where everyone’s desperate to sit at a computer and turn their ingenious opinion into dollars, hats off to Ariana for doing it. So what if she could have got $400m or $10m, either way she gets to chill in a hot tub for the rest of her life soaking her liver in red wine. That’s my opinion, and my current valuation remains at zero; there’s no justice!

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  7. So . . . does this mean we now know where Olbermann is going?

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    1. Not to AOL ;-)

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  8. I completely agree with you OM!

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  9. *Minor typo.

    ‘The political (and economic) mood in the country is vastly different and who know if the Huffington Post could keep up the momentum.’ should be : ‘The political (and economic) mood in the country is vastly different and who knows if the Huffington Post could keep up the momentum.’

    *Just thought I should point it out. Good article by the way.

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  10. [...] al mese a 437 milioni in gennaio 2011. Aggiungere le pageview dell’HuffPost nel calderone, ipotizza Om Malik, non potrà che rendere ancora più evidente tale [...]

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