AOL (NYSE:AOL) CEO Tim Armstrong shouldn’t savor his victory in the proxy battle with Starboard Value LLC.
For one thing, proxy fights are rarely successful. Also, the market reacted negatively to the news Thursday, sending shares of New York-based AOL down more than 5%, which indicates that Wall Street thought Starboard’s criticism of the company’s content strategy was valid. The Patch.com network of hyper-local sites, Armstrong’s pride and joy, won’t make money for at least the next two years. As of April, traffic to AOL totaled more than 110 million unique visitors, down from 114 million a year earlier, according to comScore.
Something has to give.
As the online ad market falters, the question isn’t whether Patch will shutter some poorly performing sites, but when and how many. Its new digital magazine, Huffington, will be lucky to break even. Moreover, AOL also remains far too dependent on its fading dial-up access business, which believe it or not, lots of people still use. The outlook for AOL, however, isn’t entirely bleak.
Under Armstrong’s leadership, New York-based AOL has made some financial gains and won the Pulitzer Prize. During the last quarter, AOL posted its fourth consecutive period of year-over-year growth in advertising. The actual gain was 5%, which given the tough macroeconomic environment, wasn’t too bad — though it might be difficult to maintain. Advertisers worried about the economy probably will curtail some spending and demand steep rate cuts.
Shares of AOL are on a roll, surging more than 80% before today. The company’s announcement that it struck a deal to sell $1 billion worth of intellectual property to Microsoft (NASDAQ:MSFT) delighted investors and sent shares soaring. Silicon Alley Insider recently proclaimed “AOL Makes The Hot Young Technology Companies Look Pathetic.” Of course, that’s nonsense. As I have argued before, getting lots of money for selling an asset is nice, but it’s no substitute for a strategy. It’s like pawning an engagement ring to pay the water bill.
Adding to the AOL euphoria is the recent announcement of the launch of Huffington, a digital newsmagazine of Huffington Post. The publication will have 24 editorial staff members and feature a variety of short, newsy nuggets and three long-form pieces that will run as long as 8,000 words. The writing, I am sure, will be top-notch and at some point might even win prestigious journalism prizes. Unfortunately, starting such a publication now makes very little business sense and highlights the tough road ahead for AOL.
For one thing, similar iPad-only publications such as News Corp’s (NASDAQ:NWSA) The Daily have struggled to find an audience. Last year, the publication attracted 120,000 weekly readers, which was less than a quarter of the figure that Rupert Murdoch’s media empire said it needed to make money. A spokeswoman for New York-based News Corp had no immediate comment for this story.
Another highbrow website, Slate.com, has struggled to be profitable ever since it was founded by Microsoft. The Washington Post Co. (NYSE:WPO), which acquired Slate in 2004, reported that online revenue, which includes the site, fell 7% to $24.2 million in the first quarter.
The latest data about Internet advertising trends also is not encouraging. According to the latest IAB Internet Advertising Revenue Report, Web-ad revenue rose 15% to $8.4 billion in the first quarter. That’s a slowdown over the 24% increase seen in the year earlier. If the economy continues to falter, so will spending.
Even with its numerous problems, AOL is in better shape than its main rival Yahoo (NASDAQ:YHOO), which is seeing its search market share drop as its newly elected board members figure out where to lead the company. One idea they should consider is merging with AOL. The economies of scale these companies would create would make it a force to be reckoned with in the advertising market.
Jonathan Berr is a former AOL contract writer. As of this writing, he did not hold a position in any of the aforementioned securities. Follow him on Twitter at @jdberr.
