Business | Online media

AOL’s second life

Back from the dead, AOL is reinventing itself as a media company

|NEW YORK

MOST Thursday afternoons at AOL’s New York headquarters a bell rings to announce “happy hour”, and staff flock to a keg in a meeting room. They hope they at last have cause to celebrate. “If you look at the analyst models, they had AOL never getting back to growth,” says Tim Armstrong, the firm’s boss. But in the fourth quarter of 2012, AOL’s revenue rose for the first time in eight years. Its share price has surged by more than 50% in the past year.

Could AOL be back from the grave? Mr Armstrong, a former Google executive whose first job was running a small newspaper in Boston, has tried to turn a flagging dial-up internet firm into a content company. Formerly known as America Online, the firm merged with Time Warner, a media giant, at the peak of the dotcom bubble in 2000. Jeff Bewkes, Time Warner’s boss, has admitted that the $165 billion deal was “the biggest mistake in corporate history”. Dial-up users switched to high-speed internet, AOL’s value tumbled and it was finally spun out as a separate firm in 2009.

Since then it has focused on content and collecting digital brands; in other words, it has tried to transform itself into an online version of its former mate, Time Warner. It owns TechCrunch, a technology-news site, and Patch, which provides local news in America’s richer cities, among others. In 2011 AOL paid a jaw-dropping $315m for the Huffington Post, a leftish news and opinion site that made its first profit in 2010. Since then traffic has more than doubled, to 62m unique visitors a month, according to comScore, which measures online audiences. It is the fourth-most-widely-read news site in America.

AOL used to offer its subscribers a “walled garden” of curated content. It still has its portal, Aol.com, but now it competes in a more open online world. Mr Armstrong believes that as the internet becomes more competitive, owning original content and media brands will pay off. Around 70% of online ad spending goes to the top ten networks, says Paul Zwillenberg of the Boston Consulting Group.

AOL’s dial-up business still provides good margins but is still declining (see chart). So the firm has invested in building new revenue streams. In the past two years it has launched editions of the Huffington Post in Britain, France, Italy, Spain and other countries. In May it will invade Japan. Mr Armstrong has also put money into online video, reasoning that consumers will spend more time online and that advertisers will pay more for video spots than display ads. AOL has the most American video views after YouTube. The HuffPost Live, which launched last year, is trying to be a younger, online CNN; it offers 60 hours of live video commentary a week.

Sceptics mutter that AOL’s progress has been uneven. In the fourth quarter only around 7% of its $123m in adjusted operating income came from its “brand group”, which includes its media properties. Patch probably lost around $100m last year. Each small market needs its own content and ad-sales effort; none of this is cheap. Mr Armstrong vows that Patch will be profitable by the end of the year.

The Huffington Post’s international expansion has also been costly. It probably took $55m in revenues last year, nearly double the figure for 2010, according to Enders Analysis, a research firm. But the price AOL paid looks steep, given that it is not currently thought to be profitable (AOL does not break out its numbers). Juan Señor of Innovation, a media consultancy, says many of the countries it has expanded into already had a Huffington Post-inspired website. AOL may have arrived too late to win an audience and make money.

Cultivating a media brand takes time. People said Google paid too much for YouTube ($1.7 billion in 2006), but now it is clear that it was a smart buy, says Eric Sheridan of UBS, a bank. It could be years before AOL’s content brands can silence the doubters. Meanwhile it is spending a fortune on original content even as rivals such as Yahoo and Amazon muscle into the same area.

AOL’s share-price surge should not be seen as an endorsement of its content strategy. Last year the firm sold 800 patents to Microsoft for more than $1 billion, and used the bulk of the proceeds to buy back stock. Mr Armstrong likes to remind people that he is AOL’s biggest individual shareholder, so he has an incentive to do right by the company. He has done much to revive a firm that others thought dead. But after just one quarter of growth, perhaps it is too early to tap the kegs.

This article appeared in the Business section of the print edition under the headline "AOL’s second life"

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