AOL Chases Eyeballs as Core Ad Business Disintegrates

AOL (s aol) has been spending hundreds of millions of dollars on acquisitions aimed at boosting its content businesses, including the recent purchase of the GoViral video network and the addition of TechCrunch to its technology-content unit in September, but the company’s core businesses are still declining at a rapid pace — as shown by its latest quarterly earnings report, which saw double-digit drops in revenue and profitability. That disintegration includes the advertising business that CEO Tim Armstrong seems to be betting the company’s future on, if a leaked internal strategy document is anything to go by.

Advertising revenue in the latest quarter was down 29 percent, and subscription revenue fell by 23 percent, while the company’s overall revenues dropped by 26 percent compared with the same quarter the previous year, falling to $596 million. AOL’s full-year revenues were also down by 26 percent, to $2.4-billion. Operating cash flow — one of the core measures of a company’s health — also fell by 20 percent in the most recent period and was off by 35 percent for the full year.

Laying Track as Quickly as Possible

These double-digit declines in advertising are particularly crucial for the company because Armstrong is betting the farm on ad revenue as a future cash generator. In effect, he is trying to build a massive content-and-advertising business as quickly as possible, in order to replace the rapidly-disintegrating subscription and portal business that has been AOL’s legacy for the past decade. As Ken Auletta noted in a recent profile for The New Yorker, the company still brings in hundreds of millions of dollars in revenue from people with dial-up AOL accounts (many of which they no longer need), and that is providing the cash to try to build these new businesses via acquisition. But it’s like trying to lay track quickly enough so the train doesn’t go plummeting off a cliff.

A big part of that effort is generating massive amounts of content and then trying to monetize it via Google AdWords (s goog) and other search-based advertising — at least according to a leaked strategy document. It’s not clear when the document was written, but it describes how the company is banking on increasing the number of stories it runs per month by more than 60 percent over the next four months, to 55,000, and hoping to increase the number of pageviews per story by more than 400 percent to 7,000. Writers at the company are expected to write between 5 and 10 stories per day, and story selection is to be driven by analyzing search traffic to see what kind of content people want to read about — exactly the same strategy taken by Demand Media (s dmd).

The Red Queen and the Law of Diminishing Returns

The picture painted by these slides is an obvious one: AOL is trying to ramp up its content engine to Formula One speeds, even though some parts of that engine still aren’t even working properly, and other parts have been re-engineered completely. To take just one example, Armstrong has talked repeatedly over the past year about the company’s original content strategy, and AOL hired dozens of staff for its sports-blogging network Fanhouse — then a week ago, the company effectively sold off the division to competitor Sporting News and reportedly let go about 100 people. Obviously the division didn’t have what it took to meet AOL’s goals, but what happens when other divisions can’t meet those goals either?

The problem for AOL is the same one faced by Demand and other content “farms:” namely, the chasing of eyeballs and pageviews is a game of constantly diminishing returns. Producing thousands of posts or articles every day floods the web with masses of disposable content — and while that content might get picked up by Google’s search bots (although the search giant is doing its best to weed a lot of that out), it also drives down the advertising rates that companies like AOL and Demand are basing their future livelihoods on. It’s like the Red Queen’s race in Alice in Wonderland; you have to run twice as fast just to stay in the same place. Good luck with that, AOL.

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