AOL Struggling to Patch Things Up

by Jonathan Berr | February 17, 2012 2:37 pm

Shares of AOL (NYSE:AOL[1]) are up more than 23% this year as investors have become convinced that the much-discussed turnaround of the New York-based Internet company was finally taking hold.

A key part of AOL’s strategy, the hyper-local news Patch sites, however, remains a question mark.

Patch was not well thought-out. While local newspapers have shrunk in recent years, they remain formidable competitors for local advertising dollars. Readers also still mostly trust the newspapers that have served their communities for generations, which makes it tough for new media organizations to establish themselves.

“Legacy local media companies still control 92% of all advertising, including half of all locally spent online advertising,” according to a study by market researcher Borrell Associates[2]. “And their share of online is starting to grow, at the expense of local pureplay Internet companies. “

About 863 Patch sites have been established during the past two years — an expansion that was too far too fast. News sites are not like McDonald’s (NYSE:MCD[3]) restaurants, where a Quarter Pounder tastes the same no matter where you buy it. While local officials in a given region might share common concerns, each town has its own unique quirks that can take a journalist months if not years to figure out. It’s no wonder, then, that many Patch sites lose money.

Patch’s other problem: There is nothing special about its content. Take the sensational story of the disappearance of South Carolina woman Dara Watson, who might have been the victim of a murder-suicide. The Mount Pleasant (S.C.) Patch did a decent job covering the story[4], but few people noticed it. The article featured a report on a press conference done by a local police chief and got seven Facebook “likes,” two comments from one reader, and three tweets. AOL’s Huffington Post[5] snagged an interview with the same chief for its story on Watson that got 18,000 likes and 191 comments. Huff Post cited Patch as a source.

Finding an audience is not Patch’s only problem, as Fortune magazine noted.

“Patch’s progress has been anything but smooth, plagued by questions of profitability, high-level departures, budget strains and speculation of layoffs,” according to Fortune, which says only a dozen Patch sites are profitable. “AOL has poured $160 million into the venture, despite paltry revenues. In 2011, it made just $20 million from Patch.”

Patch has had some success. Traffic more than tripled in 2011, and revenues for 2012 are already 50% of what the company made in 2011, the magazine says. These gains are off small bases. A key figure to remember is that every individual site attracts about 1,159 readers; an audience that small is a tough sell to advertisers.

While AOL is making progress in turning itself around and recently posted better-than-expected fourth-quarter results, it faces a tough road ahead with Patch. To be a success, the hyper-local sites will have to provide readers with news that they can’t find elsewhere.

Otherwise, its stories will get lost in the shuffle.

Jonathan Berr is a former AOL contract writer. As of this writing, he did not hold a position in any of the aforementioned securities.

  1. AOL:
  2. a study by market researcher Borrell Associates:
  3. MCD:
  4. a decent job covering the story:
  5. Huffington Post:

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