AOL’s Never-Ending Drama

AOL (NYSE:AOL) CEO Tim Armstrong is dragging the Internet company into the 21st century, and it isn’t pretty.

The blogosphere is buzzing with talk that the New York-based media company is ready to announce major cuts to Patch, its network of more than 800 hyper-local sites that has reportedly cost $160 million and yielded a meager $20 million profit last year.

That’s on top of AOL’s recent decision to gut its Instant Messenger Group, laying off more than 100 employees. And let’s not forget the endless cavalcade of executive departures.

As I have argued before, AOL and Yahoo! (NASDAQ:YHOO) make no sense as they are currently configured. No website launching today would attempt to offer the broad range of content that these portals do, ranging from hard-hitting news columns to videos of a baby discovering bubbles for the first time to beauty and fashion advice from model Heidi Klum.

AOL, unlike Yahoo, foolishly decided to launch Patch sites in an effort to tap into the growing local online advertising market. Patch was a bad idea for many reasons. First, it was rushed into too many markets too quickly. More importantly, though, the content was boring.

As media critic Jack Shafer wrote on last year, “I’m convinced that Web users are more interested in hypercoverage of their interests — sports teams, hobbies, food, vacations, family, games, etc. — than they are in the starving-artists’ exhibition at the farmer’s market, increasing parking-meter rates, the city budget, local real estate prices, or many of the other topics covered on Patch. Besides being wildly expensive to create, hyperlocal news doesn’t seem to appeal to a broad audience.”

Armstrong continues to defend Patch, arguing that 2012 will be a year of “significant” growth for the local sites. The Wall Street Journal quotes him as saying that Patch has already booked  in 2012 about 82% of the revenue that it generated last year. He offered few details, though, and it stands to reason that Patch’s rivals, such as newspapers, will also see their businesses improve as the economy rebounds.

Since he faces a proxy battle, Armstrong is probably considering whether to close or merge many Patch sites. Layoffs are sure to follow.

Shares of AOL have surge almost 20% this year, outperforming Yahoo, which fell 7.7% amid speculation that Armstrong would take the company private. AOL is also showing improvement. The company had its smallest revenue drop in five years in the fourth quarter and beat Wall Street’s low expectations. Overall, profit fell 66% in the quarter, and revenue growth is nowhere in sight.

Whenever companies are in trouble, they begin to look for ways to squeeze more money from their intellectual property. AOL is no exception.

Activist investor Starboard Value Fund has accused the Internet company of neglecting its “robust portfolio of extremely valuable and foundational intellectual property that has gone unrecognized and underutilized.” These 800 or so patents cover secure data transit and e-commerce turn-by-turn directions, along with search-related online advertising. Armstrong says he is addressing the situation.

Starboard, which is proposing an alternative slate of directors at the company’s annual meeting, argues that AOL’s patent portfolio could produce more than $1 billion in licensing income if it were properly monetized. That’s a big “if,” though, because patent fights are often expensive and can take years to settle, which is why companies try to avoid them whenever possible. It’s also a sign of desperation, like pawning a wedding ring.

As an example, Eastman Kodak (NYSE:EK) must complete a sale of its intellectual property under the terms of a $950 million loan that’s keeping the photography giant afloat during its bankruptcy proceedings. Yahoo, whose shares have tumbled almost 50% over the past five years, earlier this week filed a patent-infringement suit against Facebook.

The social network called the lawsuit “puzzling,” which is understandable considering that Yahoo is making its claim eight years after Facebook was founded. It seems strange that it took Yahoo that long to notice it was being ripped off.

Armstrong has complained about the “drama” that surrounds his company. Sadly, he has brought a lot of it on himself.

Jonathan Berr is a former AOL contract writer. He doesn’t own shares of any of the companies mentioned here.

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