Why AOL wants the Huffington Post

By The Economist online

IT WILL, apparently, “create a scaled connection between global and local communities on one platform” and “has the potential to make AOL the most influential company in the content space”. The memo from Tim Armstrong, the boss of AOL, announcing his company's $315m acquisition of the Huffington Post, an online news site, was so full of jargon that he must have written it himself. But what does the deal actually mean?

Mr Armstrong's memo says the acquisition fits into his firm's “80:80:80” focus, which he summarises as follows: “80% of domestic spending is done by women, 80% of commerce happens locally and 80% of considered purchases are driven by influencers”­. The Huffington Post is meant to tick the first and third of these boxes: Mr Armstrong talks about the influence that Arianna Huffington, the site's eponymous joint creator, (who will now take charge of all AOL's editorial content) has among American women, as well as the HuffPo's prominence as an organ of left-wing opinion. The HuffPo is undoubtedly influential, but these figures from Quantcast show that it has a smaller proportion of female readers than the average American website. So Mr Armstong's explanation does not really hold water.

The truth is that AOL's content is really meant to appeal to search engines, rather than humans of either sex. The company's model is to produce content of various types that scores well in web searches, attracting lots of readers who can then be bombarded with advertising. The champion of this approach is Demand Media, a so-called “content farm” that recently went public and is now worth more than the New York Times. Its articles, produced on a shoestring and served from sites such as eHow and livestrong.com, are what you have to fight your way past whenever you Google anything, so skilled is the company at tuning its content to appeal to search engines. AOL's content, which includes various specialist blogs and a network of local-news sites called Patch, is of higher quality, but it is essentially playing the same game: find ways to generate content as cheaply as possible and then try to sell advertising around it.

The Huffington Post also knows how to do this very well. In addition to columns by celebrities (many of Ms Huffington's friends are on board) it hosts thousands of bloggers, whose output varies enormously in quality, and who produce mountains of cheap content. This is the logic of the tie-up with AOL. The two firms have very similar strategies, namely to be a better class of content farm than Demand Media. They cannot match its low-cost model, but that may be no bad thing: Google is expected to tweak its ranking algorithm soon in a way that could push Demand Media's content down the list of search results. Aiming upmarket with more distinctive content, as the new HuffPo-AOL seems to be doing, is probably not a bad idea, given the danger of relying too much on the vagaries of Google's ranking algorithms.

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Read on: Is there a new bubble in online firms? (Dec 2010)