AOL CEO Tim Armstrong’s whole turnaround plan is to take cash flow from the company’s dying subscriber business, and make big bets on content businesses.As a framework, this is a good plan.
For the plan to work, however, Armstrong has to make good big bets.
One of Armstrong’s biggest bets so far is on a network of local news sites called Patch – a company Armstrong founded in 2007 and had AOL acquire after he was made CEO in 2009.
Barclays analyst Douglas Anmuth believes AOL will invest a staggering $120 million in Patch this year. With more than 800 editors and loads of salespeople, that sounds about right.
$120 million is a lot of money, even for AOL. AOL’s subscription revenues will total just about $700 million dollars this year.
So, is Patch a good bet? Let’s look at the numbers…
In January, we decided the answer was no. Actually we were a bit harsher than that. We said, “Patch Is A Huge Waste Of Money, And It Has Us Worried About Tim Armstrong’s Ability To Run AOL.”
What got us so grumpy was a story in the New Yorker that said Patch sites attract just 3 million unique visitors each month.
That is a pathetically low number for a media company with more than 800 editors.
By contrast, Huffington Post, with about 100 editorial staffers and 200+ employees overall, has 25 million unique visitors each month. With much smaller costs and much bigger traffic, Huffington Post only just turned profitable in late 2010.
But here’s some good news for all the Patch editors and other local news true believers inside and outside AOL.
The traffic number reported by the New Yorker is misleading – on two counts, actually. For one, it’s now low. ComScore says Patch had 4 million uniques in January, not 3 million.
For another, reporting a network-wide number for Patch’s traffic glosses over the fact that most of Patch’s 800 or so editors and sites are new, and that a big percentage of that traffic comes from a few more proven, established sites.
A Patch spokesperson tells us almost 90% of Patch sites are less than 6-months old and that 31% of Patch’s total traffic comes from its top 100 markets, which make up 13% of Patch’s markets.
Also not reported in the New Yorker’s story are the initiatives Patch is taking to drive up those traffic numbers. AOL is using IP-targeting to put local news links at the top of AOL Mail, for example. Patch is also pushing click-friendly headlines on its editors – stuff like “Five Things You Need to Know Today” and “Five Things To Do This Weekend”
Patch editors aren’t all happy about these changes, but we’re on management’s side. 10 Things You Need To Know Today has been a big hit for us, with lots of clicks and lots of positive reader feedback. Magazines have made listicles coverline staples for decades for a reason.
Now here’s the bad news…
THE BAD NEWS
While these numbers paint a much more positive picture of Patch, they still leave us cold about the AOL subsidiary’s long-term prospects as a traditionally ad-supported media company.
Let’s imagine an excellent-case scenario.
In this scenario, the bottom 87% of Patch’s markets – the new, under 6-months-old sites that are on pace to attract as much traffic as the old ones, but don’t yet – will perform as well as the older, top 13%.
If that were to happen, Patch will soon have around 10 million unique visitors.
How much can Patch grow from there?
Right now, Patch tells us that top 13% of its sites have already reached 50% reach in their communities. That’s pretty high.
But let’s suppose that Patch is a wonderful product, and everyone in every community ends up reading their local patch – and that Patch’s nationwide reach doubles to 100%.
Then Patch will have 20+ million uniques.
That sounds like a big number until you remember that Patch has ~800 editors, a couple hundred sales people, and whole bunch of support staff in New York. Remember, Huffington Post just turned profitable this year, and it has about 20 million more uniques with about 900 fewer staffers than Patch.
Huffpo will generate about $50 million of revenue this year from its 25+ million uniques. Unless Patch generates several times the revenue-per-unique that Huffpo gets, the ad-driven numbers just don’t work. Even if Patch got to 25 million uniques and generated $100 million of revenue (2X Huffpo’s per unique), it would still be losing money.
So the big honking problem with Patch is that even in an excellent-case traffic scenario, it just doesn’t get that much traffic for the amount of money it costs to operate.
So, is there no hope?…
Photo: Michael Seto
THE ONLY WAY PATCH CAN WIN
The only way Patch wins is if it can prove that local, geographically-pinpointed traffic is more valuable than national, broad-based traffic – by several multiples.
And maybe it’s possible to do that with the current ad model, but it’s going to require huge (expensive) local sales efforts and pricing that is at least 3X as high as national ad pricing.
One other route to a win might be through building the monetization engine that everyone else is now jumping into with both feet: Daily Deals.
The good news for Tim Armstrong and his Patch boss, Warren Webster, is that there is a startup out there right now doing just that. Groupon, which sells nothing but local advertising, turned down a $6 billion acquisition offer from Google last fall, and is on track to IPO at a $15 billion valuation in 2011 or 2012.
Of course, Groupon has 51 million email subscribers, who already buy deals worth $2+ billion a year.
Right now, Patch just sells banner ads, video profiles, upgraded listings, out of town listings, and coupons.
If Patch can grow to 20 million uniques and if it can convince a big proportion of its readers to subscribe to a daily email with a Groupon-like coupon attached – two very big ifs – there is some hope for Patch – and, in turn, AOL.
So far, it’s looking good. A Patch rep tells us that newsletter subscribers grew 33% in February, 174% in the last three months, and 603% in the last 6 months. (Though it’s easy to grow fast off a small base.) In the three towns where Patch has resided longest, 35% of the population subscribes to their local newsletter.
Of course, building an email newsletter business is quite different than building a coupon business like Groupon’s. So Patch will have to build that, too.
But maybe, someday, Patch can get to 10 million or so email subscribers, and build a huge local deal salesforce (which is different than a display sales force). And then go compete with Groupon.
That would be a wonderful outcome, considering the current dismal cost-to-revenues ratio.
But here’s another question: If AOL intends to monetise local content through daily deals, wouldn’t it have been easier to take the hundreds of millions of dollars being invested in Patch and invest them in Groupon’s closest competitor, AOL cofounder Steve Case’s local investment LivingSocial?