Why Buy Associated Content? All About Niche, Says Yahoo

For months, most of the attention on Yahoo’s content has been about the company’s efforts to expand its coverage and enhance its quality. Now the company is in the spotlight for acquiring Associated Content, which, depending on your point of view, is either a content farm or a producer of massive amounts of user-generated content. Whatever you call it, Associated Content’s model of combining SEO content with assignment based by algorithm is a far cry from just about anything else Yahoo (NSDQ: YHOO) is producing or licensing. And that’s exactly why Yahoo wants it.

Yahoo Media VP James Pitaro explains: “This is about extending our content offerings so that we’re relevant to both a mass and a niche audience. It’s the next phase for our content business.” Yahoo, he says, already has the mass audience with #1 sites in various categories, including news, sports and finance. What it doesn’t do very well is niche — not niche topics like the various verticals it already has, but content for niche audiences.

Pitaro says the AC acquisition will help by:

— rounding out content offerings within its own media sites.
— producing content directly in response to audience needs, “which is by the way something we’ve done historically but really will be able to scale now.’
— offering the the ability to get more local.
— providing the infrastructure to build content specifically for advertisers, allowing Yahoo to partner more easily, so the thinking goes, with advertisers and produce branded entertainment at a much lower cost with scale.

Advertiser-specific content is one of the three major ways Yahoo sees to make money from Associated Content. Pitaro reached for an example and came up with a hypothetical Procter & Gamble package on brushing teeth more effectively. “They need content; that’s the type we haven’t historically been able to generate.” The other two: using their content to grow Yahoo’s own audience reach and engagement leading to more ad dollars and partnering with Associated Content to create new areas across Yahoo’s sites.

In return, Associated Content gets access to Yahoo’s data from search, click thru rates and Yahoo Buzz for its SEO efforts. Pitaro explains, “Associated Content can now now take their existing algorithms and all this Yahoo data and generate content based on all these insights.”

Yahoo hopes to keep the team, including founder Luke Beatty, intact but will take over sales. That ultimately could wind up being run by AC CEO Patrick Keane, a former Googler, now in discussions, we’ve confirmed, to take the top Yahoo sales job vacated by Joanne Bradford when she left for — irony alert — Demand Media.

But what about quality? “They have very good quality across all media,. I would say quality is their main differentiator. Their editorial process is more rigorous than what we expected.” Even so, Pitaro says another editorial layer will be added in for content appearing on Yahoo’s own sites. When I asked how about the image factor in adding “commodity” content, he came back to quality. “This really is about adding quality content to Yahoo. … Just look at our track record and look at the investments we’ve made across media. We have every intention of continuing to invest in the professional writers and editors. This is meant to be complementary and additive.” Then again, defining quality these days can be a lot like defining obscenity.

The even bigger question when it comes to Yahoo is how will it manage the integration? To put it mildly, this company doesn’t have the best track record of integrating acquisitions and this one looks to be complicated. One example: Pitaro expects AC content to show up across all of Yahoo’s verticals but that process can’t even begin until the deal closes.

The competition: Integration is one of the issues that came up when I spoke with Demand Media’s Steven Kydd and Dave Panos about the deal. Kydd, a Yahoo vet who helped found Demand Studios, pointed out: “Yahoo has made a variety of acquisitions over the past few years and not all of them have been integrated and exploited in a way everyone had expected. … They will have their hands full.” He added, “We’re very excited to already be in the acceleration phase instead of experimentation or integration.” Panos pointed to professional video production as one of the ways Demand differs from the competition; Demand is one of the leading providers to YouTube. About 30 percent of Associated Content’s production is video and audio.

Validation: The concept of validation came up in several conversations I had after the deal was announced. The Demand execs see it as validation of their model. Kydd’s take: “AOL and Yahoo are clearly recognizing the value of new models of creating content in an efficient way.” AOL sees it as a validation of CEO Tim Armstrong’s strategy to acquire hyperlocal start-up Patch and to invest heavily in its version of a content generator, Seed.com. Then again, Armstrong gave AC his personal gold star when he invested in it while at Google; (NSDQ: GOOG) he still holds roughly 20 percent, and, according to a good source, when he suggested AOL buy it before the spin. As the story goes, Time Warner (NYSE: TWX) CEO Jeff Bewkes, who said yes to $850 million for Bebo when the previous regime asked, said no that time, leading to the in-house investment in Seed.

And it came up with Geoff Reiss, the Associated Content CEO before last who still holds an undisclosed stake. (Good timing for Reiss, who heads digital for on-the-block Newsweek.) “This is a validation of a business model that is being built in a variety of places between Glam, Demand and AOL (NYSE: AOL). It’s a sign that (Yahoo knows) AOL takes it seriously and that they were feeling a little behind. It’s the surest sign of validation of a business model that we’ve had from an established player since the New York Times (NYSE: NYT) took out About.”

Of course, the surest sign will be if it works.