AOL+HuffPo! Why It is Not Really a Good Deal

Just when you thought you could finally put Superbowl commercials behind you and go to bed in a beer-induced slumber, AOL dropped a late-night bomb: it bought The Huffington Post for $315 million, of which $300 million is in cash. My first reaction –- wow! I had called for HuffPo being acquired by MSNBC before the end of 2011. But then those are the perils of the prediction game. The acquisition is not a surprise, considering AOL has been on a buyout rampage.

“Our strategy is to invest in as many brands as we can: brands that cut across devices and distribution channels,” AOL CEO Tim Armstrong told me in a conversation last year, “We will use M&A if we believe that is what is needed and it helps us get brands and helps expand our platforms.” HuffPo buyout is just that. Or what my dear friend Pip Coburn (an investor) would call yet another CEO promise of future bliss.

But when you get over the initial ka-pow reaction and start thinking about the deal, not everything adds up. Here is my breakdown of the deal.

1. The Return of The Eyeballs

First AOL snapped up our friends at Techcrunch. Now they have acquired Huffington Post. In between those two events Demand Media went public and is now valued at around $1.6 billion, about $800 million shy of AOL, which is valued at $2.4 billion.

Of course, there was also Yahoo buying Associated Content and Newsweek merging with the Daily Beast, but let’s leave them to their own devices for a moment. AOL has also bought other eyeball-centric companies such as GoViral. These deals are a clear indication that as more and more ad dollars shift to the web -– $28.5 billion in Internet advertising in 2011 –- the eyeballs and (by extension) page views are getting attention in the marketplace.

It wouldn’t surprise me to see more such quick-let’s-add-some-page-views-to-our-arsenal deals.  It wouldn’t surprise me to see Huffington Post’s main — and perhaps better — rival, Politco, get acquired over the next twelve months. I would predict MSNBC as a likely candidate to acquire them.

2. Arianna Goes To The Bank. Laughing!

Huffington Post was valued between $300 million to $450 million in 2010, according to Bloomberg. In that story that ran on December 14, Huffington said: “It’s working. Everybody’s happy with how it’s going. Nobody is in a hurry to cash out.” Ironic, considering that was around the time Armstrong was trying to buy the company.

For Huffington and her partner and investors, this is a sweet deal. Why? Because they are selling at the top of the market! The Huffington Post (and TV political commentators such as MSNBC’s Keith Olbermann) tasted success during a special kind of political climate, just as their rivals Fox and its commentators. The political (and economic) mood in the country is vastly different now, and who knows if the Huffington Post can keep up the momentum.

The numbers tell a part of the story. Quantcast, which measures the Huffington Post’s traffic, says it gets about 40 million people a month, and over past six months it has slowly been gaining a new audience, but has seen its page views drop from 600 million a month to 437 million in January 2011. The page views per person have declined by half. Even monthly visits per person are trending down. (update: see below)

According to some estimates, HuffPo did $31 million in revenues for 2010. At 500 million pageviews a month, the company is bringing in a little more than a $1 per user per year. Arianna did the best thing – locked in her profits.  What more, she gets to be the editorial figurehead for the new American Media Company.

3. For Armstrong, No Time To Lose

Tim Armstrong, AOL’s CEO has little or no choice but to make this and more bold moves. His company is racing against time. He has articulated a very content-centric strategy. In a recent article in The New Yorker (subscription required), Armstrong pointed out that since the Internet was a chaotic place, AOL would prove to be the filter and provide information that was crafted by its editorial production line. I use the phrase editorial production line mostly because a recently leaked AOL internal strategy document is all about journalism on a low budget.

He wants AOL home page to be the start page for information, but unfortunately it is not going to happen – the world of today doesn’t work that way. People have their favorites and start their news day at random places. And then there is the whole Patch effort to rule the local market – which apparently loses about $30 million a quarter and they are about to ramp-up spending on Patch sites from $75 million a year to $160 million a year. Guess how that is going to work out.

AOL’s moves are much like the ending scene from Butch Cassidy and The Sundance Kid. Surrounded by the Bolivian Army, Dos Hombres have no choice to make a gallant dash to their horses, guns blazing, hoping against hope as thousand guns blaze around them. The ever-increasing web inventory is like the Bolivian Army firing on AOL and others who have not yet come to terms with the futility of chasing page views.

Despite what you might read in the newspapers and blogs, AOL is still in A-O-Hell. In the most recent quarter, the company saw its advertising revenues go down 29 percent, at a time when online advertising grew about 14 percent. According to eMarketer, its share of total online display advertising was down to 5.3 percent in 2010 from 6.8 percent in 2009.

Display advertising tanked during the last three months of 2010 – ironic since holiday season is viewed as one where brand advertisers open their checkbooks.  I wonder if adding more page views from HuffPo is only going to exacerbate these problems in the coming quarters. (Mathew Ingram wrote about AOL’s growing headaches earlier this month.)

In a chat with The New York Times, charming and always quotable Armstrong quipped “I think this is going to be a situation where 1 plus 1 equals 11.”

Let’s not get ahead of ourselves, for in this case one plus one ends up equaling none – as we might soon see!

Update: In an email, Mario Ruiz a spokesperson for HuffPo argued that it was Quantcast that was making a mistake when it came to monthly pageviews and that there were two different views into the monthly pageviews. I am investigation this weird situation further. In the interim, here is a graphic HuffPo shared with me.

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