Tim Armstrong Gives His Passionate defence Of AOL's Decision To Spend Millions On Patch

Tim Armstrong Smiles

Photo: All Things D

The most controversial thing about Tim Armstrong’s tenure as CEO of AOL is his decision to go all-in with Patch, the network of hyper local sites.It seems to be a total disaster. AOL is burning millions and getting almost nothing in return.

Speaking to investors at an Internet conference hosted by Barclays, Tim Armstrong laid out his defence of Patch.

Here’s a transcript of what he said, via our Bloomberg Terminal. We’ve edited it lightly to fix some typos/places that didn’t make sense in the transcript:

So, let me be really specific about this because I thought there’s a lot of questions about Patch. So, one of – I would just start by saying I’m a rational investor, and I have a lot of tens of millions of dollars, my own money in the company and I think wealth depends on millions of dollars, so I understand the value of the nickel. And I would not put investors in any situation that I wouldn’t want to be in myself. And let me just explain why I think Patch is a good investment and why we’re going to hold it at a very high standard.

One is the average Patch roughly costs $150,000 to run. The average marketplace that it’s in has about $900 million of commerce. When you strip out cars and auto, there’s still about $350 million to $400 million of commerce in most of the zip codes that we’re in with Patch. And when we launched Patch, we didn’t just decide we’re going to have a platform and scale it all over the place. We basically did a 59-point algorithm which I’ve talked about before, which took everything from student-to-teacher ratios to voting participation to tax information and those things. And we stack ranked 18,000 towns in the United States and basically put a GDP number against all of them and then worked backwards from there in terms of what towns we should go to first and how we should go there.

And when you look at Patch right now, there’s tremendous interest in it, both from a consumer and advertiser landscape. There’s no tremendous interest in it from a media landscape other than to say a lot of – basically, gossip about Patch in terms of what has happened, what’s happening there and how is it performing and people love to talk about it. But the reality is Patch has gone from zero to – went up to number four in local – in one year on the Internet. Two, that it has a really solid usage in terms of what people feel about it in the communities and towns and we have an ongoing relationship with the people in these communities. And from a revenue standpoint, we just started ramping up the sales force last year which I was very direct about. I mean, I knew Patch was going to cost a lot of money and we were upfront about that. And we also said we weren’t going to hire to ramp up the sales force until we’re starting really about March of last year. But we’ve been ramping up the sales force. Patch has sold about 82% of the revenue that ran on Patch all of last year. It’s already been signed so far this year. And I would expect it to grow really quickly.

And I’ve looked at some of the other recent IPOs in the local space. And I think when you compare Patch’s metrics and ability to grow versus some of those IPOs that have come out, I think – and you look at the type of content we have and the type of relationships we’re building with the advertisers, Patch may be a longer-term investment, but I think it can be significantly valuable.

And my expectation is from a margin standpoint that eventually Patch should have strong double-digit margins and growth in all of these communities … I mean, if you look at the local community newspaper space from 1965 to 1995 or 1998 or 1999, you’ll get Yellow Pages, community newspapers, those things, they all had very good margins, very high revenue numbers per market. And that need in those communities is still there. I mean, we wouldn’t have gotten 10 million to 15 million people in Patch in one year if there wasn’t a need for the product.

And now, like we’re really figuring out how to serve the advertisers well. And we haven’t really gotten into commerce yet which we will at some point and we have a whole bunch of new products and services coming out between now and probably July 15 or July 13. And I think those products will basically have a meaningful impact in terms of Patches to consumer and revenue opportunity.

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