As Facebook draws close to the billion-user mark and a $100-billion market valuation, the giant social network’s dominance has reignited old fears about the decline and fall of the open web. John Battelle argues that we need a manifesto for the truly open Internet in order to rally the troops, but blogging veteran Robert Scoble says it is too late and he has already given up the fight. And longtime technology watcher and investor Esther Dyson says we need to remember that the Internet is prone to cycles of open vs. closed. In the end, the only thing that determines whether a closed model succeeds is the willingness of users to put up with its restrictions. For Facebook, that is both its biggest strength and its biggest weakness.

Not that long ago, the open web seemed to be the default for most users: America Online, one of the longest-lasting of the old walled-garden portals, was mostly an afterthought, used only by older consumers who were tied to its dial-up business (a business that even now continues to provide the lion’s share of AOL’s declining profits). Google was the model of the open web, with its objective algorithms and its commitment to sending users away instead of trying to keep them on its site. Websites and blogs were run on open platforms like WordPress (see disclosure), TypePad or Blogger, and anyone could link to anyone.

Then along came Facebook, which took the ultimate “gated community” approach right from the outset by restricting access to university students. As it grew and expanded, it maintained this walled-garden strategy by making it easy for users (and their precious data) to get into its network but much harder for them to get out — something Google highlighted in an attack on the social network’s data-hoarding policies. And the trend has only continued with the rollout of Facebook’s frictionless-sharing apps, which effectively make the network the hub of personal activity of all kinds, even newspaper reading.

If the garden is appealing, the walls don’t matter

What is the benefit for users that makes them so eager to place their entire online experience in the hands of a single company? The same as it was with America Online: namely, the fact that it provides a friendlier, safer — and ultimately easier to use — version of the Internet for non-geeks. As John Battelle puts it:

The open web is full of spam, shady operators, and blatant falsehoods. Outside of a relatively small percentage of high quality sites, most of the web is chock full of popup ads and other interruptive come-ons [but] in the curated gardens of places like Apple and Facebook, the weeds are kept to a minimum, and the user experience is just . . . better.

For open-web advocates like Dave Winer, there is almost nothing to like about this phenomenon — or, to shift the spotlight from Facebook for a moment, the fact that a powerful, global real-time information network like Twitter is controlled by a single corporate entity. The risks for Twitter users have been highlighted by the company’s announcement that it will censor tweets if asked to do so and by attempts on the part of countries like Brazil (and even the U.S.) to force the company to either turn over data or block specific accounts that they disapprove of.

Open alternatives such as Status.net and the would-be Facebook competitor Diaspora exist, and they have attracted support from the hard-core geek community. But they have made virtually zero impact on the vast majority of Internet users, who seem more than happy to disregard all the warnings about proprietary models coming from open advocates, including the man who invented the World Wide Web.

If there is one thing that we can learn from the runaway success of Apple, it is that the vast majority of users don’t particularly care about abstract concepts like openness or metaphors like walled gardens. What they care about, as Chris Saad of Echo and Dataportability.org noted recently, is that the products or services that matter to them about are easy to use and provide some benefit to them. In effect, they are willing to make a trade-off between the virtues of data portability or the downsides of having a single entity control their experience and the benefit they get from that product or service.

If you stop being useful, users will revolt

If you have a really attractive garden, users are more than happy to spend time there without moaning about the walls or the gates. In a nutshell, that explains Facebook’s dramatic rise: It has made connecting with friends and sort-of friends so easy and provided so many obvious benefits — photo sharing being one of the main ones — that most users have been blissfully unconcerned about giving so much of their personal data to the network. And while some argue they should be paid for their membership, others clearly feel that the trade-off is more than worth it.

So far, so good. But the looming risk for both Facebook and any other provider that wants to control the output of its users — including Twitter and Google — is that even complacent users can become militant when the service they depend on mistreats them in some way. We have seen flashes of that whenever Facebook changes its privacy settings, when Twitter changed its censorship rules, and even when Google started fiddling with its search results to promote its own social network instead of remaining objective about its content. And we see flashes of it when Facebook blocks content, as it has with breast-feeding photos — causing demonstrations by outraged user groups.

While none of these tremors has turned into a seismic shift so far, that doesn’t mean they won’t. AOL seemed so dominant in its time that it managed to convince Time Warner that it was worth $160 billion, in what is still one of the most disastrous technology deals of all time. But it faded because users realized that the benefits of being inside its garden were far outweighed by the downsides and that the open Internet wasn’t so bad after all. Will users eventually come to the same conclusion about Apple or Facebook — or even Google?

For social networks and tools like Facebook and Twitter, the relationship with users is an even more fragile one. Facebook’s 800 million users may seem like an unassailable moat around the giant social network, but if enough of them decide they are better off elsewhere, Facebook will become a ghost town. Twitter could easily meet the same fate. As Mark Zuckerberg prepares to count his billions, he needs to remember that in the end, it’s not open or closed that wins — it’s useful and not useful.

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In a blog post at her eponymous website, Arianna Huffington has provided some numbers that describe the growth of the news network over the past year — a year that coincided with its acquisition by AOL for $315 million — and more than a few of them are eye-popping. At a time when some newspaper websites are happy to get page views in the tens of millions in a month, The Huffington Post racked up more than a billion page views in December. And while page views can be inflated, some of the site’s other metrics show that if there’s one thing the team that build the HuffPo understands, it is how to get reader engagement to hit levels that other news sites and publishers can only dream of.

It should be noted that AOL started redirecting its existing news portal site to the Huffington Post site in May, which undoubtedly helped boost many of the traffic numbers (although it’s not clear just how many visitors the AOL News site was getting when it made the switch). That could help explain why unique monthly visitors — a metric that many websites prefer over raw page views — climbed by almost 50 percent to 36 million. But in any case, that puts the site ahead of the New York Times, and not far behind the Daily Mail, the largest newspaper site with 45 million unique visitors a month.

Not the web’s largest news site, but it’s getting there

The Huffington Post isn’t quite the largest news site on the web just yet — Yahoo News says that it gets more than 80 million unique visitors a month, and more than 5 billion pageviews, and CNN gets about 73 million uniques a month. And there are some other massive websites who are on the fringes of the media business: Reddit recently crossed the 2 billion page-view mark, and says it gets about 34 million uniques a month, and Tumblr said recently that it gets over 15 billion page views a month, and reaches about 120 million users through its network of 42 million blogs.

Apart from the monthly unique visitor or page-view figures, however, some of the most fascinating numbers from Huffington Post are the ones around reader participation, including more than 6 million comments in the past month alone, and more than 1.4 million referrals from Facebook in a single day. Some of the other numbers include:

• Comments on a single day: 253,331 (Jan 25, 2012)
• New commenters signing up per day: 5,500
• Social referrals in a month: 21.6 million (December 2011)
• Facebook referrals in a day: 1.4 million (January 4, 2012)
• Blog posts in last year: 61,688
• Stories published per day: over 1,000

One of the secrets to the site’s massive traffic numbers is probably the sheer volume of stories and blog posts that Huffington Post publishes — over 1,000 every day. Many of those, of course, are likely to be the kind of “aggregated” story from another publication that has drawn so much criticism from traditional news entities such as the New York Times. And in many cases, at least judging by the numbers above, the Huffington Post is probably getting orders of magnitude more engagement from readers even on those stories than the newspaper or website that originally carried them.

The lesson: Use whatever social tools are available

Among the things the Huffington Post did that helped make it a social-news behemoth was to integrate Facebook’s open platform (then called Facebook Connect) into the site almost as soon as it was launched — something that immediately allowed readers to see what articles their friends had read, shared and commented on. That drove millions of readers to the site, and also boosted the number of comments by over 50 percent. And the site has also integrated virtually every other sharing tool known to man to make it easy for readers to share, and even come up with some of its own.

Traditional media critics attack the Huffington Post for its aggregation, but as Nieman fellow David Skok pointed out recently at the Nieman Lab blog, aggregation is deeply embedded in the DNA of the media industry, and always has been. And as we’ve tried to point out before at GigaOM, aggregation and particularly curation are two of the skills that modern media companies need the most — or readers overwhelmed by information will go elsewhere, whether to apps like Flipboard and Zite or to new services that give them the tools they need to filter that growing ocean of content.

Some media outlets are experimenting with new services that show they understand this, including Reuters with its just-launched Social Pulse feature — which aggregates top news from both its wire service and other news sites. Meanwhile, new players like BuzzFeed (which is run by many of the key players from the early Huffington Post) are moving from being just aggregators to becoming news entities in their own right by hiring reporters, and even Tumblr is hiring journalists to act as curators of its network — a very media-like thing to do. New media entities are everywhere, it seems.

Post and thumbnail photos courtesy of Flickr users Libertinus Yomango and World Economic Forum

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The online media business got a surprise on Monday, when the news broke that Politico correspondent Ben Smith was joining BuzzFeed, the pop-culture meme generator whose current offerings trend more towards funny cat videos than in-depth political coverage. But Smith isn’t giving up reporting for a beat trolling 4chan for new memes — he is becoming editor-in-chief and said he will be hiring at least a dozen reporters to break news of all kinds, including political. Can BuzzFeed become a new Huffington Post? Why not? If the rise of Arianna’s media empire has shown us anything, it’s that new media entities can spring from the most unlikely sources.

The Huffington Post arose from Arianna Huffington’s personal Rolodex of contacts, most of whom agreed to write blogs on the site for nothing, and that helped provide the foundation for what became a giant media entity in less than five years — one that rivalled the venerable New York Times website in terms of traffic, and was eventually acquired earlier this year by AOL for $315 million. Huffington has since become the head of all the former web giant’s media properties, and thus one of the most powerful executives at the company next to CEO Tim Armstrong.

Understanding how media functions in a digital age

But just as important as Arianna Huffington’s contact list was the understanding of how a new-media outlet functions in the web era, and that knowledge came in part from one of the key players behind BuzzFeed — namely Jonah Peretti, who co-founded the Huffington Post (and also Ken Lerer, one of the Huffington Post’s early financial backers). Peretti in particular has been credited by many with turning the blog network into a new-media machine, by focusing on the power that social media tools such as Twitter and Facebook could have in driving traffic and engagement.

Long before many other media outlets decided to dip their toes into Facebook integration by implementing comments powered by the social network, or creating “social reading” apps like those the Washington Post and The Guardian recently launched, the Huffington Post had launched a deep integration with the site through what was then called Facebook Connect — and within a matter of months, it saw a massive increase in comments, logins via Facebook and traffic from the social network.

The Huffington Post has also been one of the leaders in using other social tools such as Twitter as both news-gathering and news-distribution methods — something that many traditional media entities are still only coming to realize can be a very powerful driver of engagement with readers, and hence of important advertising-related metrics like time spent, repeat visits, etc. And while BuzzFeed’s content may not be at the same kind of intellectual level as Ben Smith’s Politico coverage, or even the Huffington Post, the site has shown that it also understands how media works in a social age. Smith said he sees his new job as being to build a new media entity on top of this foundation:

to help build the first true social news organization — that is, an outfit built on the understanding that readers increasingly get and share their news on Twitter, Facebook, and other platforms.

Social sharing is how the news is distributed now

In a sense, BuzzFeed is coming at the building of a new-media company from the exact opposite perspective as most mainstream media entities such as the New York Times or the Washington Post. While they are taking traditional strengths in things like reporting, analysis and other tenets of journalism and trying to add social features and integrate what they do with new tools such as Twitter or Facebook or Tumblr, BuzzFeed is taking a platform that understands how social media works and trying to add journalistic features. Which approach is likely to be harder?

It’s easy to dismiss BuzzFeed as a foolish waste of time, a site that cares more about off-color jokes than serious journalism (it even happily chronicled the various memes that sprang from the news about Smith joining the company). But for a growing number of web users — regardless of their intellectual abilities — sharing a remixed video or image related to a popular news event is a big part of the way they consume media now. Media companies that fail to understand that and take advantage of it will find themselves on the sidelines while others like BuzzFeed prosper.

Whether BuzzFeed can create a new-media entity — one that becomes known for its serious journalism and political scoops — on top of the social-sharing engine it has already built remains to be seen. But traditional media players should resist the temptation to dismiss this potential competitor: they did that with the Huffington Post, and it didn’t end well.

Post and thumbnail photos courtesy of Flickr users George Kelly and World Economic Forum

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Various sources inside AOL say that the company is focusing more of its resources on “media” or rather a web media approach championed by the Huffington Post team and less on applications.

We have followed Garlinghouse’s career since his days as an executive for Dialpad, a VoIP service that was eventually acquired by Yahoo. He joined AOL’s west coast operations in 2009 to help revive the company’s fortunes through new applications and new services. AOL is going through internal convulsions and is still trying to stabilize under the leadership of CEO Tim Armstrong.

Even before AOL’s future started to look dodgy — with speculation about the future of CEO Tim Armstrong ramping up, as the company’s financial underperformance continues — the rollout of the Patch.com hyperlocal news project seemed exceptionally ambitious. To create a thousand local newsrooms across the country felt a lot like a “boil the ocean” kind of venture, with impossibly high costs and a slim chance of success. According to some reports, AOL is now busy scaling back its ambitions for Patch as well as trying to cut costs, which could ultimately wind up jeopardizing what the project was designed to do in the first place.

A report by Jeff Bercovici in Forbes magazine says the 800 or so editor/reporters who run Patch’s local outlets “have been told their budgets for freelance assignments are being reduced, in some cases severely,” and content is also being re-used across multiple local sites within the Patch network. There have also been some reports that editorial staff within Patch are being asked to help with advertising sales, a move some see as crossing the editorial/advertising divide that exists in most journalistic entities. And there have been a couple of high-profile departures from the ad-sales side of the AOL unit, which doesn’t create a lot of confidence about how that part of the business is doing.

AOL is said to be committed, but for how long?

Patch president Warren Webster, however, has said in a number of interviews that AOL remains committed to the effort, and that reports of its imminent demise have been greatly exaggerated. He told Forbes that while editors in charge of some local Patch units have been working to help come up with advertising campaigns and ideas, this has been a result of their own initiative, not something AOL has forced them to do. And he told StreetFight — an online magazine that covers the hyperlocal sector — that the former web portal is pleased with the progress it has made so far:

We are succeeding on a number of levels, and our users and advertising clients remind us of that every day. Building something as ambitious and important to communities as Patch is a long-term investment… the company is very committed to Patch.

AOL’s management may be committed to Patch on an ideological level — the hyperlocal market has been a fascination of CEO Tim Armstrong’s since before he joined AOL, when he helped to finance Patch as an investor while still at Google — but the question of how long can it continue its financial commitment remains. The project has so far cost the company more than $130 million dollars, and if it reaches its goals, it could cost another $30 million or so (although Forbes says the 1,000-town goal is being downplayed). That’s a lot of money for a company that continues to post disappointing results, after reassuring investors numerous times that its balance sheet was close to turning the corner.

Not only that, but Armstrong has repeatedly promised that some Patch outlets would be profitable by the end of this year, and that window is quickly closing. According to some reports, the company is even spreading advertising sales around so that Patch’s better-performing offices look profitable, although Webster denied that this was happening in his interview with StreetFight. If AOL can’t show that hyperlocal advertising is a workable strategy, then the skepticism about the viability of the project is going to accelerate, to the point where Armstrong could find himself facing unpleasant questions from his board — like the ones Yahoo CEO Carol Bartz faced just before she was ousted.

Can Patch cut its way to profitability?

Webster told Forbes that the reduction of freelance content at Patch’s sites was always part of the larger plan, and posting content from other Patch outlets across the network also made sense, even if it stretches the concept of what local means. But those steps also feel like an attempt to get a handle on the millions being spent on the project — along with a recent shift in focus that is aimed at getting more bloggers to post their content to Patch’s sites free of charge (including one controversial effort that is targeted at high-school students), in the same way many contributors do to Huffington Post.

But are there enough bloggers who can fill that gap? And will AOL be sharing any of the advertising revenue it hopes to generate with them?

Huffington Post has also been rolling out more locally-themed topic pages, including several recent ones aimed at readers in Detroit and Miami — and these efforts have also caused speculation about whether the company is more interested in an aggregation approach rather than unique content, since the former is substantially less expensive. The problem for Patch is that the more its sites become lookalike aggregators rather than having a unique voice, the less likely they are to appeal to the market they are aimed at, and the less desirable they will be as an advertising vehicle.

AOL’s management may be committed to Patch for now, but the company can’t continue pouring money into an unprofitable entity forever, no matter how much Webster talks about a “long-term” investment. AOL doesn’t really have the luxury of thinking long term at the moment — Armstrong has to show some positive movement to investors or his job is likely in jeopardy, and without him Patch loses its biggest champion.

Post and thumbnail photos courtesy of Flickr user Stewart Chambers

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The idea that AOL might want to merge with Yahoo — as it reportedly does, according to a pair of anonymous sources who spoke to Bloomberg News on Friday — isn’t all that surprising. There have been rumors about merger talks between AOL and its fellow former web giant off and on since 2008, with the most recent round coming at the end of last year. The only question left is which analogy you prefer when it comes to picturing this potential combination: two old dogs roped together? Two bricks tied up in the hope that they will float? Two drunks trying to prop each other up as they stagger down the street? Feel free to fill in your own suggestions below.

According to the Bloomberg report, AOL has opened up discussions with Yahoo’s financial advisors, and suggested the two companies could be combined, with AOL CEO Tim Armstrong emerging as the CEO of the new entity after the deal. Yahoo, of course, is currently in need of a chief executive, since it just finished giving its old one — Carol Bartz — the heave-ho earlier this week, something Bartz apparently took with her usual display of tact and grace (there have also been reports that co-founder Jerry Yang might be trying to mount a bid to take Yahoo private).

Is Yahoo playing hard to get?

Within minutes of the Bloomberg report hitting the web, CNBC (c cmcsa) posted to its Twitter account that it had heard from a Yahoo source that the company had no interest in merging with AOL. That doesn’t necessarily mean a deal couldn’t happen, however — Yahoo’s response could be a negotiating tactic, or the board of directors may not want to show its hand publicly at this point. It’s also possible Yahoo could wind up in play whether it wants to be or not. According to the Wall Street Journal,the last AOL bid to merge involved several large private-equity firms who wanted to finance the deal.

CNBC: Source Close To Yahoo Says No Interest In A Deal With AOL @Yahoo @AOL—
  (@CNBC) September 09, 2011

AOL’s interest in a deal is easy to explain: As we noted in a recent post, Armstrong is likely feeling some heat as a result of the company’s moribund financial performance, and is looking for some kind of way to generate value. Like his former counterpart at Yahoo, he has spent two years cutting costs and trying to generate new lines of business — including the purchase of The Huffington Post for $315 million, and more than $150 million spent on building out the hyperlocal Patch.com network.

But while AOL’s chief executive has continually promised that a turnaround is near, with every quarterly report that goal continues to recede into the distance. Analysts say he either has to split the company up and sell the pieces, or find some other way of generating value — or be removed from the job so someone else can. And while merging with Yahoo probably wouldn’t be a great long-term strategy, it might produce enough of a short-term benefit for the company’s investors that Armstrong could justify doing it.

The proposal that Bloomberg described in its report is similar to the one that AOL was apparently floating in the fall of last year, which would have seen Yahoo either acquire AOL outright (since it is much larger than AOL, with a market capitalization of about $18 billion, compared to AOL’s $1.6 billion), or merge with the former web portal in a complex deal involving the sale of Yahoo’s investment in Chinese web giant Alibaba — which is responsible for much of the company’s current market value.

Memories of 2008 and a rejected Microsoft bid

The idea of an AOL-Yahoo merger was also discussed in 2008, when Microsoft made a $45-billion takeover bid for Yahoo — a bid the web company no doubt wishes it had taken at this point, since its market value is less than a third of that now (something that likely contributed to the poor reviews for former CEO Bartz). Eventually, Microsoft withdrew its bid for Yahoo, and the talks about a merger with AOL never proceeded.

Are the chances of a deal any better this time around? It’s hard to see how. The biggest stumbling block to a merger is the lack of any compelling rationale for doing one, despite efforts to make that case. Both companies are suffering from the same overall problem: They have millions of visitors to their web properties, but the advertising revenue that they are able to generate from that traffic remains unimpressive, and is likely to dwindle. AOL has the added problem of watching its dial-up access business — which generates the majority of its cash flow — continue to disintegrate.

Hence the “two rocks tied together” metaphors. A merger may make Tim Armstrong look (at least briefly) like a success, and possibly catapult him into the CEO’s chair at Yahoo — but combining these two ailing giants isn’t going to magically produce a competitive web business, no matter how many financial architects get their hands on the deal.

Post and thumbnail photos courtesy of Flickr user Hans Gerwitz

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AOL CEO Tim Armstrong

After months of speculation about her tenure in the top job at Yahoo, CEO Carol Bartz has been fired by a board that appears to have finally grown weary of the web company’s perennial also-ran status. Coincidentally enough, there’s another tech company CEO who has spent two years trying — and failing — to turn around a former web giant: AOL chief executive Tim Armstrong. If the AOL board of directors applies the same kind of logic that Yahoo’s did (a decision that should arguably have come a lot sooner, as Om notes), then Armstrong might want to freshen up his résumé.

In many ways, Yahoo and AOL are like different sides of the same coin: Both are gigantic enterprises, and both have legacy businesses that produce plenty of cash but are also a drag on the company that prevent them from being more innovative. For AOL, the dial-up access business continues to generate money — money that Armstrong has used to buy The Huffington Post and to start the Patch.com hyperlocal news venture, among other things — but it is declining rapidly. For Yahoo, it’s the content side of the business and the giant portals that it operates, which continue to get millions of visitors.

Unfortunately for Yahoo, those millions of visitors appear to be worth less and less every day. As the web has expanded, raw page views have become a low-income commodity, and compounding that problem is the shift of online advertising towards social networks like Facebook. It’s no coincidence that Facebook’s advertising revenue has climbed into the billions of dollars over the past several years, while traditional web publishers like Yahoo have struggled to show any advertising growth at all.

Building a content business as advertising slides

AOL is fighting this same trend. Armstrong has made huge bets on content in an attempt to build scale, but investors are skeptical about when (or if) that’s going to pay off. His biggest bet on content, the launch of Patch.com — a network of close to 900 hyperlocal media sites across the country that are staffed by journalists and fed by unpaid bloggers, Huffington Post-style — has cost the company more than $150 million, and is likely to cost that much or more to roll out nationwide if AOL decides to do that.

Patch is an ambitious gamble, but some analysts argue that a company in AOL’s position doesn’t really have the time to watch a gamble like that come to fruition, or spend the hundreds of millions of dollars that it likely will take to do so. As Sameet Sinha of institutional research firm B. Riley tells Connie Loizos of PEHub:

Local is going to be big; I think everyone realizes that. But in this sort of capital markets environment, long-term projects aren’t given much leeway, especially a project like Patch that is much more people intensive than tech intensive

Armstrong seems to be hoping that simply by acquiring enough scale — in other words, enough page views and clicks via The Huffington Post, Patch and other content-based moves he has made since taking over the company — AOL can somehow generate ad revenue that will make it an attractive investment again, and also make up for the declining cash coming from the dial-up business. But every time he says AOL is close to reaching this goal, the goal seems to move further into the distance, and the market is getting fed up with waiting.

Break up or not, Armstrong could be gone

So what can Armstrong do? Paul Kedrosky, a financial analyst and senior fellow at The Kauffman Foundation, tells PEHub that the AOL chief executive has to figure out some way of turning the former web giant into a money-maker, likely by splitting the company into pieces and selling off the ones that aren’t contributing to growth. There have also been reports that AOL might be considering a private-equity deal, which would see the company acquired by a group of institutional investors, who would then presumably auction off the pieces to the highest bidder.

In the end, Kedrosky argues that Armstrong may be doomed regardless of what he does. If he doesn’t break the company up and sell off enough pieces to make it look attractive to investors again, he could get the boot, and if he does break it up and sell the pieces, he’s likely to be replaced once that job is finished. As he told PEHub:

The instant that happens, Tim is gone. He’s a pleasant face to put on a transaction like this, and that has to be among his highest obligations. But if he doesn’t complete it, he’s gone. If he does, he’s gone.

The problem for AOL is that replacing Armstrong isn’t guaranteed to fix things either. Yahoo thought Bartz would be the right leader to turn its sinking ship around, and it has spent two years figuring out this isn’t the case. She proved to be very good at selling things, but not so great at building new businesses. Who’s to say the replacement for either Bartz or Armstrong is going to have any more success than their predecessor? These two former titans may simply have outlived their usefulness.

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Although it rebounded somewhat later in the day along with the rest of the major stock indexes, AOL shares got hammered on Tuesday after the company released its latest earnings, falling by as much as 30 percent from the previous day. That decline put the stock more than 50 percent lower than it was earlier this year when the web giant acquired The Huffington Post for $315 million. Why such a beating? Because while the company showed some revenue growth, it lowered its forecasts for the coming year, in effect telling investors and analysts that the much-promised turnaround they have been waiting for is still a long way off.

In its earnings release, AOL said that it lost $11.8 million, or 11 cents a share. But most Wall Street analysts who cover the stock were expecting a small profit, based on what AOL management had told them previously about how its business was going. As if that nasty surprise wasn’t enough, the company also said that its overall revenues fell, to $542 million from $592 million in the same quarter a year ago — a performance that also came in below most Wall Street estimates.

Some investors have given up hope

AOL’s shareholders and supporters (of which there are still a few) have been gamely holding on for the better part of a year now, waiting for CEO Tim Armstrong to produce some significant growth in either revenue or profits — or preferably both — from the one-time web giant. Every quarter, AOL’s chief executive says that the company is close to turning the corner, and then the corner continues to recede into the distance. It’s probably not surprising that some investors appear to have given up and dumped the stock.

But it isn’t just the unexpected loss or the lower revenue that has some analysts concerned about AOL’s future. The company also turned in a lower-than-expected result from its display-advertising business — sales in that part of the web company were up 9 percent, but that was much less growth than expected, and substantially less than the 12-percent increase in the previous quarter. That kind of surprise is especially important because the display ad business is the engine that Tim Armstrong has repeatedly told investors is close to firing on all cylinders, thanks in part to a broad restructuring of the AOL content business and the acquisition of Huffington Post.

AOL CEO Tim Armstrong

As we’ve described before, the acquisition of Arianna Huffington’s empire effectively amounted to a transplant operation, which saw many of AOL’s core editorial properties get shut down or gutted — a move that led to more than 900 layoffs — and replaced with HuffPo assets under the control of Arianna Huffington. The other big bet that AOL has been making in an attempt to turn its fortunes around is the estimated $100 million or so that it has spent on building out its hyperlocal Patch.com news operation, which is now up and running in almost 900 towns across the United States.

AOL’s two biggest bets have yet to pay off

Neither of those large bets has paid off yet in any kind of significant way, however. While Huffington Post has been benefiting from the traffic that AOL can send it from its other properties, and Armstrong gave it credit for some of the ad-revenue improvement, its contribution has been relatively small — and Patch has not produced much in terms of advertising either. The network recently launched a Huffington Post-style “blog aggregation” platform in what appears to be an attempt to lower costs for the unit while still appealing to readers and advertisers with local content.

Armstrong maintained on a conference call with analysts to discuss the results that while the company had missed estimates and lowered its forecasts, AOL is “on a growth path.” Among other things, he noted that the web giant had increased its ad revenue for the first time in three years (although most of that came from its network, rather than its own display advertising business). Said Armstrong:

We have cleaned up and simplified our operations. We are witnessing encouraging metrics in key growth areas and we are seeing the beginning of this manifest in our reported numbers. AOL is a healthier company today than it was a year ago.

That prognosis didn’t convince many analysts, however. Based on what Goldman Sachs said was “deteriorating display ad trends” and a 20-percent cut to its cash-flow forecast, the firm cut its six-month price target for the stock to $14 from the $24 level following AOL’s results. Citi analyst Mark Mahaney also cut his target price for the shares to $18 from $23, based on the disappointing ad revenue performance and the company’s lower estimates for the upcoming quarter.

AOL’s chief executive may be convinced that the company is healthier than it used to be, but investors seem to need more proof. And missing revenue estimates, cutting forecasts, spending hundreds of millions on acquisitions and constantly promising a turnaround that never seems to arrive doesn’t appear to be doing the trick.

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Everywhere around us we see evidence of chaos and upheaval in the media industry — newspapers laying off staff and even closing, advertising revenues continuing to decline and so on. What can be done about this state of affairs? Media analyst and journalism professor Clay Shirky says not only is there nothing that can be done about it but also that it may actually be a good thing, because it will help spur innovation. Let’s hope he is right, because there is plenty of chaos to go around.

In his post (on a blog that is almost defiantly old-school, with a default WordPress theme from about 2003), Shirky says that his thinking on the topic has been accelerated by wondering what he is going to tell his undergraduate journalism students about the industry they are planning to join when he starts teaching at New York University in the fall. The realization he has come to, he says, is that “the news” — broadly speaking — needs to be subsidized, cheap and free.

But how can it be all these things at once? And by subsidized, does Shirky mean government subsidies, as some have recommended? As it turns out, he doesn’t. In many cases, he says, those subsidies may come from other lines of business (conferences, etc.), from donations — as with ProPublica and some other models such as the Guardian, which is supported by a trust fund — and from simple cost-cutting.

And what about the free part? Although Shirky doesn’t specifically deal with the idea of paywalls (an issue he has been skeptical about for some time), he makes the point that the news “needs to be free so that it will spread” — in other words, so that people will share it and distribute it in a variety of ways for nothing. And what about those media entities that decide to produce only what people will pay for directly, like Rupert Murdoch has done with the Times of London?

[C]reating a high-quality product for a group of loyal and passionate readers willing to pay for it certainly sounds like an interesting business to get into. It just doesn’t sound like the newspaper business.

As Shirky points out, the cost-cutting that makes the news cheap doesn’t just have to come from layoffs (of the kind that Guardian editor Alan Rusbridger referred to in his recent announcement of a “digital first” approach for the paper). Costs can also be reduced by using a variety of crowdsourcing tools and services to let readers and other interested individuals share the burden of producing the news, whether it’s through blogs or photo galleries or “citizen journalism” tools such as Tackable (interestingly, Shirky never once mentions AOL’s Patch and its hyper-local efforts).

The bottom line, Shirky seems to be saying, is that this environment of chaos isn’t just obvious or understandable but actually necessary, so that the industry can evolve — whether it wants to or not. In that sense, Shirky’s post strikes a similar note as one he wrote back in 2009 called “Newspapers and Thinking the Unthinkable,” in which he argued that everyone looking for a solution to the media industry’s problems is searching in vain, because there isn’t one. In other words, not only is there no single solution but most of the likely solutions are simply unknown.

That is what real revolutions are like. The old stuff gets broken faster than the new stuff is put in its place. The importance of any given experiment isn’t apparent at the moment it appears; big changes stall, small changes spread. Even the revolutionaries can’t predict what will happen.

The problem, as many including Shirky have described it, is that readers have never paid for the news content in newspapers — at best, they have “helped pay for the things that paid for the news.” And now advertisers are going elsewhere, including targeted websites and social networks, because they can reach the people they want directly and more cheaply. The access that newspapers used to control to those desirable readers is gone. And digital advertising may ultimately never fill the gap between the price that advertisers will pay for a print reader and what they will pay for an online one.

The ‘analog dollars to digital dimes’ problem doesn’t actually seem to be a problem. It seems to be a feature of reality. Digital revenue per head is not replacing lost print revenue and, barring some astonishment in the advertising market, it never will.

In general, Shirky’s point seems to be that innovation and experimentation need to happen before anything becomes clear, and he is undoubtedly right on that score. Unfortunately, as I wrote recently, that kind of startup-style impulse is sorely lacking in most mainstream media entities, who are content to incrementally dip their toes into new media tools and projects without really trying too hard. Why do something radical when you can just put out an app and throw up a paywall?

It takes some guts for a media analyst and pundit to admit that he doesn’t have all the answers or solutions for the industry, but Shirky has always been better at that than some others of his ilk. And he does at least provide some hints about what he thinks will help while we figure out the answers — things like cost-cutting and crowdsourcing, for example, and just all-around experimentation. What is really required, of course, is a rethinking of what being a news organization means in an age when real-time publishing is available to anyone. But unfortunately, there is still far too little of that happening.

Post and thumbnail photos courtesy of Flickr user Mark Strozier

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Skype’s most recent Windows beta allows its users to have IM conversations with Facebook users as well as integration of Facebook contacts and news feeds. The folks at Skype Journal took a closer at the application’s network traffic, which revealed that it uses XMPP to communicate with Facebook’s servers.

This type of integration could in the future be used to achieve interoperability with other IM platforms. Microsoft’s own Windows Live Messenger currently doesn’t support XMPP, but companies like Yahoo and AOL have been offering some support for the protocol. Facebook added XMPP support to its platform in 2009 to make its chat service more widely available as well.

By far the biggest supporter of XMPP is Google. Not only is the company’s IM service based on the protocol, but it’s also one of the main financial backers of the XMPP Standards Foundation. Just last week, the company announced that it was transitioning elements of its VOIP technology to Jingle, a signaling protocol based on XMPP.

Speaking of VOIP: The fact that Skype has started to support an open standards protocol doesn’t meant hat you’ll see voice or video chat interoperability any time soon. Skype has been using it own, proprietary encryption and communications protocols for its VOIP functionality, and it’s unlikely that Microsoft would abandon these technologies in favor of Google-backed open standards.

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A few days ago, amid the glitz of the annual Cannes Lions festival, Arianna Huffington — no stranger to the glamorous surroundings — announced that the British edition of Huffington Post would be launching on July 6, less than two weeks away. This in itself is not a huge surprise: the idea that the site (which sold to AOL for $315 million in February) would eventually cross the Atlantic first emerged in March, although the date wasn’t confirmed. But now, with the launch closing in fast, some of the details are starting to come out on how HuffPo UK might actually work.

According to a report by Paidcontent, the British edition will be led by editor-in-chief Carla Bevan, who joined AOL last year from the magazine Marie Claire and has since been running the company’s U.K. content operation. In the role of politics editor — an important job, given Huffpo’s elbowing in on the American political sphere — will be former BBC radio reporter Chris Wimpress: not a household name, but somebody with experience working for the country’s most respected news broadcast, Radio 4’s Today programme.

In addition, a look through the web shows that they’ll be supported by a roster of hires including Michael Rundle (assistant news & politics editor), Dina Rickman (assistant politics editor), Caroline Frost (entertainment editor), Sarah Dean (deputy entertainment editor), Andy Welch (TV editor) and Luke McGee (assistant blogs & communities editor). Most of those have been brought over from other AOL properties too, rather than recruited from rival news organizations.

So what does this tell us? Well, first, that Huffington Post UK is looking — on the surface, at least — more like a reworking of the current AOL UK operation than a brand new entity. That’s a low-risk strategy, but as I’ve previously argued, it might take more to make an impact in a highly competitive media market like Britain.

Secondly, it’s interesting that this team consists almost exclusively of young journalists, with very few of the high-level, experienced hands that Huffington has made a great play of luring over in the United States. There’s no equivalent, for example, to the likes of political heavy-hitter Howard Fineman, brought over from Newsweek, media reporting veteran Michael Calderone from Yahoo or award-winning reporter Trymaine Lee from the New York Times.

Are they biding their time, or simply setting their sights lower? According to a job specification seen by GigaOM, the site seems to be interested in recruiting largely junior roles right now, despite asking for “a little black book to rival Arianna’s” and at least five years of experience working at a successful site.

The last question is what the site will actually look like. That’s obviously still up for grabs, but even here there are a few clues. Right now the Huffingtonpost.co.uk domain is password protected to stop prying eyes from taking a look — but some crumbs of evidence held in Google’s cache indicate that the site will look almost exactly like its parent.

Those cached pages point to a service that seems to be carved almost entirely from the existing Huffington Post design, while pulling in few small design elements from existing AOL properties. As far as content? Stories currently on the site include a piece from Irish political blogger Jason O’Mahony called “Europe: Get off your knees or learn Chinese”, and one from Alex Larman called “Why I became a conservative”. Of course, the chances are that what we see now are largely placeholder parts lifted from AOL’s pages, rather than a preview of the final version. But it’s perhaps indicative of the direction we might see a British version of the site go.

Personally, it all seems a bit timid. I’m not sure whether that’s just because we’re going to see a soft approach, or whether — as I worried about Twitter’s London HQ the other day — it’s just a low-risk attempt by an American brand to jump in on some of the lucrative advertising money sloshing around on the other side of the Atlantic.

Only two weeks until we find out.

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It’s great that your magazine or newspaper website has millions of page views or unique visitors a month, but those kinds of statistics mean less and less when traditional banner ads bring in virtual pennies for the media companies running them. Some see iPad apps and paywalls as the solution, but several major media outlets such as Hearst and AOL have started experimenting with other ways of monetizing their content — and even Google says it wants to help by making traditional online advertising more efficient for publishers.

Google’s contribution comes in the form of an acquisition. The search giant confirmed on Monday that it’s buying AdMeld, which provides tools that allow online publishers to make their ad buying and placement more efficient. According to several reports, Google is paying $400 million for the company, which makes it one of Google’s largest acquisitions. The web giant says it’s buying AdMeld because “we often hear from major website publishers that ad management today is still mind-numbingly complicated and inefficient.”

Meanwhile, both AOL’s Patch and Hearst are experimenting with different forms of advertising that they hope will convert browsers and readers into shoppers: AOL, for example, has partnered with a service that American Express runs called Serve to launch a Groupon-style “daily deals” offering. As part of the deal, customers can get a co-branded AmEx  card that lets them redeem offers at the point of sale without having to print out coupons (something Groupon users apparently complain about).

The AOL unit has more than 800 Patch sites across the U.S., a hyper-local project it has spent more than $100 million on since it launched last year. But while traffic to Patch sites has been climbing — according to some recent estimates — the revenue being generated by the operation is still minuscule. Will local readers be attracted by daily deals from merchants in their area? That’s the bet AOL is making, and some traditional publishers such as the Toronto Star (which acquired a Groupon clone called WagJag last year) say they have been using a similar strategy with some success.

Hearst Magazines, meanwhile, has formed a partnership with a company called Pixazza that allows readers to click on images, find out more about products in the image, then click through and buy them if they wish. This kind of interactive ad has been the dream of advertisers since the commercial web was first invented, but it has never really paid off in the way most had hoped. Hearst is also partnering with Buddy Media to develop Facebook-based apps that allow more interactivity with the magazines’ content.

Whether any of these monetization attempts will ultimately be successful is anyone’s guess. Patch is a gigantic bet by AOL that locally relevant content will draw enough readers to make an advertising-based revenue model work, and the Serve deal is just another twist on that — if not enough readers come to Patch sites, it won’t really matter what kind of advertising the site has. Likewise, Hearst could be trying to squeeze revenue out of a smaller and smaller group of traditional magazine readers.

That said, however, at least there is some experimentation going on, rather than just the same old creatively bankrupt banner advertising campaigns that media sites have been relying on forever. No one has found the formula for generating revenue from online publishing, so the more experimentation that occurs the better.

Post and thumbnail photos courtesy of Flickr user Emilian Robert Vicol

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AOL, which is trying desperately to manufacture a new business model as its legacy businesses continue to collapse, has made two gigantic and potentially life-altering bets over the past year. One is the $315 million it spent to buy The Huffington Post earlier this year — followed by the disembowelling of its existing editorial operation — and the second is the $100-million or so it has spent on building out its “hyper-local” Patch.com unit.Which of these is most likely to come to AOL’s rescue? The answer isn’t clear, and the right answer may turn out to be: neither.

At first, the purchase of Huffington Post looked like it might just be a way to add a fast-growing new media entity to AOL’s existing editorial business, a kind of supercharger for AOL’s family of news, financial, sports and other topic-related websites. But in the wake of the acquisition, it quickly became obvious that AOL CEO Tim Armstrong actually had something different in mind: He saw Huffington Post as a replacement for much of that editorial operation — like a heart-and-lung transplant for AOL’s media arm.

What is still unclear is whether that transplant will take, or whether the patient will reject it. AOL took a scythe to much of its existing sites such as AOL Finance and AOL Politics, laying off hundreds of staffers — including many who had been hired specifically to grow those sites and bring name-brand writers to the editorial side — and more have left in the wake of the Huffington Post merger (one senior editor was asked to stick around just long enough to fire his entire staff and then was given his own dismissal letter soon afterwards).

Large mergers are never easy, but they can be especially difficult when the cultures of the two merging are so different, and there has been much talk about this being the case with the HuffPo and AOL. One is seen as the epitome of a new-media entity, and was said to be close to profitability before the deal, while the other is a slow-moving and bureaucratic organization that is desperately trying to reinvent itself. And while Huffington Post is expanding (including a Canadian unit that recently launched), it’s not clear yet whether Arianna Huffington can export that model to new markets and make money doing so.

Then there’s Patch.com, which has so far created more than 800 separate editorial units in small and medium-sized towns and cities across much of the U.S. over the past year and a half. While that’s impressive, the venture has also cost in excess of $100 million, and the spending continues to increase. AOL recently launched what it’s hoping could become a HuffPo-style blogger network that would supplement Patch’s internally produced content — and, not coincidentally, do so free of charge — but the jury is still out on that effort as well.

Even more important than the content question or even the venture’s costs, however, is the question of whether Patch will ever actually be able to make money, or enough money to make it worthwhile for AOL to continue. There are reports that Patch’s sales efforts — which appear to rely on getting local advertisers to sign up for banner ads and other traditional mechanisms on their hyper-local sites — are not going well. Patch’s traffic is increasing, but revenue is a black hole.

Could Patch offer a Groupon-style offering that appeals to those advertisers? Possibly, but so far there are no signs of it appearing, and that opportunity could be closing quickly, as Patch and other competitors — some run by local newspapers and other media outlets who are jumping on the Groupon bandwagon — rush to fill the gap.

What AOL has right now is an aging legacy business that continues to produce cash but is declining rapidly, and two new businesses that have high costs — especially in Patch’s case — but have yet to show that they can produce anything like the kind of cash AOL is used to making. All we have is CEO Tim Armstrong’s assurances that eventually this will occur, which at this point seems to fall into the category of wishful thinking.

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Accelerating health entrepreneurs

While the headline is attention-grabbing, the move is more about the larger goal of stimulating health entrepreneurship, something Levin has been learning first hand after joining OrganizedWisdom, a startup which gathers health information from medical professionals. Levin, who will chair StartUp Health, and OrganizedWisdom CEO Steve Krein came up with the idea of building a community of entrepreneurs dedicated to health care after realizing that there weren’t the same type of resources, investors and mentors focused in this field as there are in other sectors. The two got together with Startup America Partnership officials at South by Southwest earlier this year and began putting together a partnership.

StartUp Health — which is being unveiled on Thursday at the Department of Health and Human Services and the Institute of Medicine’s Health Data Initiative Forum – will build off the work of OrganizedWisdom and will offer start-ups access to its technology, the information it has learned and its board members and mentors, like Levin and entrepreneur Esther Dyson. The idea is to help supply entrepreneurs in this field with the tools, connections and funding necessary to help them scale from an early stage start-up to a polished company.

“As I got deeply involved in OrganizedWisdom, it looked like all the talent in the industry was going to e-commerce, location and games but relatively few were going into health and wellness and that struck me as something that needs to be corrected,” Levin said. “We’re trying to create a vehicle to inspire the creative talent of entrepreneurs and create a community not only to provide guidance and financing but a strategy for long-term company building.”

Public-private partnership

The initiative is just getting underway, and there are more details about funding sources and mentors and the structure of the program that will emerge in the coming months. One of the first steps will be to initiate a series of StartUp Health Roundtables, the first of which will be hosted in July in New York. StartUp Health will partner with StartUp America Partnership for the event and Case will moderate it. StartUp Health will partner with StartUp America by sharing resources, tools and deal flow analysis.

The Department of Health and Human Services has also helped the cause by releasing health care data to support innovations in information technology. HHS CTO Todd Park will host a second roundtable later this year. And the department is also joining the StartUp Health pledge to show its commitment to the initiative.

OrganizedWisdom CEO Krein said the time is ripe for innovation in health care. Krein said while it used to take millions of dollars to develop breakthroughs, the barriers to entry have been lowered and we’re now seeing websites and mobile apps that are tackling real health problems. Meanwhile, the government is making more data available for innovators to leverage. The key is to accelerate the growth of health startups, he said.

“We want to connect the dots around the ecosystem so there is finally a place entrepreneurs can find a roadmap and get resources to start a business,” said Krein.

Healthcare unites

That Levin and Case are reuniting over health care shouldn’t be too surprising, and it’s almost fitting. Both have migrated to health care issues after their companies’ merger. In 2002, Levin opened the Moonview Sanctuary, a health and wellness treatment center in Santa Monica with his wife. Case launched Revolution Health, aimed at improving the wellness of people. Both have also seen the need for health care first hand. Levin has been diagnosed with Parkinsons disease while Case’s brother died of cancer.

Levin said the two have kept in touch over the years, but this is the first time they’re working together again. He said it’s an important collaboration because healthcare is a critical area that need innovation.

“It’s kind of nice to meet each other again,” Levin said of Case. “He knew of my interest in health care and given his family history he has reason to be really active in it too. Everyone has some kind of back story that relates to health care. It’s a universal thing.”

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Over 150 big brands have built Facebook stores, meaning apps that can handle transactions rather than just function as marketing brochures or catalogs. Facebook store-builder Payvment claims it has 60,000 stores running in its network of Facebook apps. ShopIgniter, Milyoni, and Payvment compete with a dozen or more other startups that offer white-label e-commerce platforms for Facebook, including Usablenet, MoonToast, Fluid and 8thBridge, which raised $10 million in March. Other companies, such as ShopTab and SortPrice, help retailers integrate Facebook pages to online stores . The space is getting a little crowded.

While a Booz & Co. survey of social network users who shop online implied that 27 percent of them would be interested in buying within a social network, 73 percent wouldn’t. Based on interviews with online retailers, Forrester doesn’t think social networks are very effective at promotion, let alone generating actual sales. What’s more, online shopping is a directed, search-driven activity, and the mall approach of aggregating stores didn’t work for big portals like Yahoo and AOL, even with their powerful promotion capabilities.

Based on his analysis of the psychology of shopping, social psychologist Paul Marsden thinks Facebook stores will be good for impulse buying as well as more-considered purchases that depend on word of mouth, especially for first-time buys in high-risk categories. That makes sense to me for certain product categories where personal experience is highly valued, such as expensive vacation packages and high-end baby carriages for new mothers. I’m less convinced it will outweigh structured comparison searching for financial services or consumer electronics, where exhaustive inventories, “technical” info, price comparison and expert advice should rule. Impulse purchases often require instant gratification, which would seem to point in the direction of digital goods like movies, music and games.

But these tactics could help retailers make their Facebook stores more effective, despite the challenges:

• In-stream promotion. Facebook lacks a big front-page ad format that could drive new DVD releases or Mother’s Day flower purchases. The closest equivalent is promoting products in the news feed. Sales and group offers might cut through the clutter.
• Social commerce integration. Facebook says its own Offers will focus on group purchases rather than discounts. Integrating proven social commerce elements like daily deals, flash sales and group buying for fans with the store will be critical.
• Ties to brick-and-mortar loyalty programs. Retailers should allow points redemption in their Facebook stores and even count Facebook store visits toward check-in deal points.

For more of my thoughts on the challenges facing Facebook stores, read my Weekly Update at GigaOM Pro (subscription required).

Image courtesy of: flickr user Auswandern Malaysia

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I sat down with Case on Friday at the TiE Silicon Valley conference to get a few more specifics on his newest roles. A short video clip from our talk is embedded below.

Startup America is generally focused on “celebrating and accelerating” entrepreneurs across all sectors and geographic regions of the U.S. by providing tools to help them grow, Case told me. “We particularly help people in the speed-up phase, when you really see one of these companies on a growth trajectory,” he said. “What can be done in terms of giving them access to services, or access to customers, or access to talent, to increase the odds that they’ll make that transition to be a successful company.”

Meanwhile, with the Council on Jobs and Competitiveness, he advocates for specific governmental policies that would make it easier for people to start and build companies. “That’s really more trying to get people in [Washington] D.C., the White House working with Congress, to put policies in place that are more entrepreneur-friendly.” He said the council is currently targeting policies on immigration, FDA regulations, and regulations around initial public offerings, to name a few.

In both roles, he’s hoping to create Silicon Valley-like ecosystems across the country and in sectors beyond technology. ”There is something magical about Silicon Valley,” Case said. “It’s hard to get a healthy, vibrant, entrepreneurial ecosystem working… and Silicon Valley does have that.” 

Case also offered advice for what entrepreneurs themselves can do to position their companies for success: Don’t start a company just because you think it will be a quick flip. “A lot of people are starting businesses because they think it’s an opportunity to make some money,” Case said. “You occasionally get lucky, but that doesn’t really work. You have to be passionate about it.”

In this video, Steve Case talks to GigaOM about how he juggles his many roles, how Silicon Valley is the “epicenter of innovation” in the US, and why entrepreneurs should be motivated by more than money:

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