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AOL (s 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.