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Patch’s new math: the painful path to profit

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The dream of a business model that supports quality local news died a little more today when AOL’s(s aol) CEO, Tim Armstrong, said on an earnings call that the company intends to amputate about a third of its 900 “Patch” sites while also trimming costs at the remaining ones.

This means Patch will finally turn a profit by the end of the year, according to Armstrong, while the budget to run each Patch site will continue to be”much, much lower” than the $150,000 figure cited a year ago. As for the 300 or so underperforming Patches, AOL will look to pair them with “partners” (perhaps struggling local newspapers) in regional markets.

All of this is good news for AOL’s investors, most of whom have long panned the local-news network as a money-losing dud and Armstrong’s personal folly. (Update: On Thursday, AOL is reportedly set to cut 250-500 Patch jobs).

Patch’s turn to profit, however, will not cheer advocates of a local news model in which community reporters cover serious stories with the support of local advertisers. That model has failed again and again, and now the shrunken, sawed-off Patch network is just one more sign that it may never work.

The reasons for this are primarily economic. Most mom-and-pop shops don’t have the money or inclination to throw advertising dollars online while, at the same time, changes in the publishing business make a local news site even less viable than before.

Armstrong told me at a recent dinner in New York that he sees the online publishing business shaking out into two models: one involving niche high-value audiences that advertisers will pay to reach with custom ads and events; the other involving publications with huge audiences that can ingest mass amounts of automated, targeted advertisements.

“Those in the middle will be wiped out,” he said.

That’s why, under Armstrong’s binary view of publishing, Patch couldn’t make it as a community news site, but has instead become what Pando Daily describes as a “community message board network.” Under the new math, Patch can’t earn its keep selling ads to local merchants — but it can serve as funnel to show larges volumes of automated ads (conveniently sold through AOL’s ever-improving ad technology). This math makes even more sense if Patch holds onto the sites catering to the higher income demographics that advertisers crave.

All of this makes perfect sense from a business standpoint, but less so from a civic one. The fate of Patch is an admission that there is no business incentive to provide news to poor or rural communities. Indeed, a look at the existing Patches shows that to be the case: there is “hyper-local” Patch news for the affluent citizens of La Jolla, West Hollywood and Westchester county – but not for the struggling places of America.

This situation isn’t the fault of Tim Armstrong, who loves news and community and whose devotion to Patch nearly cost him his job. Instead, it’s a policy problem tied to the collapse of newspapers and the market for local news. Alas, the solution, despite recent local news initiatives by Google(s goog), seems even more remote than it did 10 years ago.

13 Responses to “Patch’s new math: the painful path to profit”

  1. Phyllis Stein

    > This situation isn’t the fault of Tim Armstrong

    Actually, as CEO, yes it is totally his fault for pursuing a losing strategy.

    > Networked plays such as Patch fail precisely because they are *not* local.


  2. Larry Grimes

    The market for local news is as strong as ever. Patch’s failings include: repeatedly going into markets that were already adequately covered from a news standpoint, by a local newspaper, news radio and TV. And then throwing inadequate resources behind those projects, which resulted in really poor products. A little homework into the news biz would have saved AOL a billion dollars; money much better spent elsewhere. .Thank goodness Armstrong had real estate assets (note–not AOL digital assets) to sell off to fund the acquisitions he made that are working.

  3. Dylan Smith

    AOL’s Patch is failing not because local news isn’t a solid business, but because they’re not local.

    The local news industry is strong, healthy and growing — the real *local* segment of the industry. The hundred-plus members of Local Independent Online News Publishers and our many colleagues running local news websites are demonstrating that every day.

    Local doesn’t scale. We’ve seen it again and again; giant chains trying to templatize the production of news. That’s not a tactic that worked in print for Gannett and others, and it certainly won’t work online. The troubles of large-scale attempts at covering local news are only relevant to LION Publishers in that they show the contrast between the operations of local businesses and chains.

    Networked plays such as Patch fail precisely because they are *not* local. They seek to profit from communities, rather than being invested in them. Centralized planning leads to success in journalism just as effectively as it worked for Soviet agriculture.

    The national networked plays haven’t, but many locally run news outlets are finding success – because their readers and sponsors value their community connections. Local news sites can connect local small business owners with the engaged local readers who are their customer base — and do so effectively and affordably.

    We regularly see LION members announcing that their readership and revenues are reaching new heights, that they’re hiring new staffers and deepening their coverage.

    Local news is successful when it truly *is* local — historically, when newspapers and radio stations were owned by families or local partnerships, they served their communities more effectively. Chains broke that model, focusing more on quarterly reports, stock prices and executive salaries than long-term investments. Local news organizations must be *of* their communities, not just *in* them to ship profits out of town. Local news must respect readers: know what they want to know, know what they need to know, and provide it quickly, accurately and comprehensively. Cookie-cutter editorial priorities mandated on a national level are the complete opposite of that.

    Those Patch editors who are about to be laid off should take the weekend to enjoy some much-deserved time with their families, and then get in touch with a LION Publisher on Monday morning. If you’ve got the drive to be an entrepreneur, we’ve got a network of independent publishers who are ready and willing to help you establish a news outlet that is focused on your community.

  4. Jay Senter

    “This reveals – again – why the business for local news business online doesn’t work.”
    For a gigantic, top-heavy, bureaucratic organization trying to templatize what local news should look like across the country, perhaps. But be careful not to dismiss all the small, independent local online publishers who are making a very good go of it, please.

  5. Doug Hardy

    The premise of the column fails to acknowledge the obvious, ongoing growth and success of thousands of independent local publishers. Call it whatever you want, but under your radar people are seeing their revenue and audience growing.

  6. Vince Carnevale

    This is a dark time for Patch and it is particularly difficult for me to watch. I had a wonderful few years there and remember when people did not even know who we were. The strides made and the positive impact on communities cannot be denied. All the best to my friends still there. Do not give up.

  7. “The fate of Patch is an admission that there is no business incentive provide news to poor or rural communities.”
    That was always the case, long before the digital age. People launched local newspapers in communities rich and poor alike, and those in the poor ones usually folded up after the editor/publisher died or went bankrupt. It was always a labor of love – and the poorer the community, the more love it took.

    AOL, if it were in private (and family-owned) hands, might not be pushing so hard for profitability and cutting back Patch sites now. But they will be profitable with a few hundred Patch sites for places like Greenwich and Chevy Chase and Mill Valley. The BMWs and Tiffanys won’t be able to resist that buy.

    • peterroithmayr, no AOL has yet to announce which Patches are on the block. Armstrong for now has only said there are three “buckets” of patches: 1/3 that are profitable and “good looking,” 1/3 that are on their way to becoming so, and 1/3 that are not..

  8. Jim Verona

    cost him his job? why are journalists sometimes so over dramatic with sound bytes? Have you seen the equity return this guy has produced for investors like me since his tenure began and his reshaping of AOL into a real content story? There will be misses along the way but every company should have a guy this smart at the helm.