How long can AOL stay committed to Patch?

Even before AOL’s (s aol) future started to look dodgy — with speculation about the future of CEO Tim Armstrong ramping up, as the company’s financial underperformance continues — the rollout of the hyperlocal news project seemed exceptionally ambitious. To create a thousand local newsrooms across the country felt a lot like a “boil the ocean” kind of venture, with impossibly high costs and a slim chance of success. According to some reports, AOL is now busy scaling back its ambitions for Patch as well as trying to cut costs, which could ultimately wind up jeopardizing what the project was designed to do in the first place.

A report by Jeff Bercovici in Forbes magazine says the 800 or so editor/reporters who run Patch’s local outlets “have been told their budgets for freelance assignments are being reduced, in some cases severely,” and content is also being re-used across multiple local sites within the Patch network. There have also been some reports that editorial staff within Patch are being asked to help with advertising sales, a move some see as crossing the editorial/advertising divide that exists in most journalistic entities. And there have been a couple of high-profile departures from the ad-sales side of the AOL unit, which doesn’t create a lot of confidence about how that part of the business is doing.

AOL is said to be committed, but for how long?

Patch president Warren Webster, however, has said in a number of interviews that AOL remains committed to the effort, and that reports of its imminent demise have been greatly exaggerated. He told Forbes that while editors in charge of some local Patch units have been working to help come up with advertising campaigns and ideas, this has been a result of their own initiative, not something AOL has forced them to do. And he told StreetFight — an online magazine that covers the hyperlocal sector — that the former web portal is pleased with the progress it has made so far:

We are succeeding on a number of levels, and our users and advertising clients remind us of that every day. Building something as ambitious and important to communities as Patch is a long-term investment… the company is very committed to Patch.

AOL’s management may be committed to Patch on an ideological level — the hyperlocal market has been a fascination of CEO Tim Armstrong’s since before he joined AOL, when he helped to finance Patch as an investor while still at Google (s goog) — but the question of how long can it continue its financial commitment remains. The project has so far cost the company more than $130 million dollars, and if it reaches its goals, it could cost another $30 million or so (although Forbes says the 1,000-town goal is being downplayed). That’s a lot of money for a company that continues to post disappointing results, after reassuring investors numerous times that its balance sheet was close to turning the corner.

Not only that, but Armstrong has repeatedly promised that some Patch outlets would be profitable by the end of this year, and that window is quickly closing. According to some reports, the company is even spreading advertising sales around so that Patch’s better-performing offices look profitable, although Webster denied that this was happening in his interview with StreetFight. If AOL can’t show that hyperlocal advertising is a workable strategy, then the skepticism about the viability of the project is going to accelerate, to the point where Armstrong could find himself facing unpleasant questions from his board — like the ones Yahoo (s yhoo) CEO Carol Bartz faced just before she was ousted.

Can Patch cut its way to profitability?

Webster told Forbes that the reduction of freelance content at Patch’s sites was always part of the larger plan, and posting content from other Patch outlets across the network also made sense, even if it stretches the concept of what local means. But those steps also feel like an attempt to get a handle on the millions being spent on the project — along with a recent shift in focus that is aimed at getting more bloggers to post their content to Patch’s sites free of charge (including one controversial effort that is targeted at high-school students), in the same way many contributors do to Huffington Post.

But are there enough bloggers who can fill that gap? And will AOL be sharing any of the advertising revenue it hopes to generate with them?

Huffington Post has also been rolling out more locally-themed topic pages, including several recent ones aimed at readers in Detroit and Miami — and these efforts have also caused speculation about whether the company is more interested in an aggregation approach rather than unique content, since the former is substantially less expensive. The problem for Patch is that the more its sites become lookalike aggregators rather than having a unique voice, the less likely they are to appeal to the market they are aimed at, and the less desirable they will be as an advertising vehicle.

AOL’s management may be committed to Patch for now, but the company can’t continue pouring money into an unprofitable entity forever, no matter how much Webster talks about a “long-term” investment. AOL doesn’t really have the luxury of thinking long term at the moment — Armstrong has to show some positive movement to investors or his job is likely in jeopardy, and without him Patch loses its biggest champion.

Post and thumbnail photos courtesy of Flickr user Stewart Chambers