WASHINGTON, January 16, 2014 – AOL’s failing “Patch” unit, a balance sheet black hole since its acquisition, will now be the majority responsibility of New York investment firm Hale Global. AOL has sold a majority interest in Patch to that firm for an amount that was not regarded as “financially material,” according to Reuters. That’s corporate-speak that diplomatically describes AOL’s take: a small fraction of what it cost to acquire the unit.
Translation: AOL took a bath on the deal.
Patch will be run as a limited liability company (LLC) once the transaction is completed. The irony of this recent turn of events is that current AOL CEO Tim Armstrong actually helped underwrite Patch, which was later acquired by the troubled company in yet another failed attempt to re-establish at least some of the Internet dominance AOL enjoyed in the 1990s.
Essentially a divestiture of Patch, the current move marks another notable and significant failure for AOL. Not that many years ago, the onetime network and ISP giant acquired Fortune 500 media conglomerate Time-Warner. But in less than two years, the entire entertainment and media enterprise – renamed AOL Time-Warner – had been run into the ground under the leadership of AOL founder Steve Case. Case departed under a cloud. As the company restructured, its once-dominant and now-unwanted AOL Internet portal was ingloriously spun back off and left to fend for itself. Its future remains uncertain.
At the time it was founded in 2007—just before the Great Recession sent everything crashing down around it—Patch seemed like another bright Internet idea whose time had come. Across the country, ewspapers large and small were failing, due in varying measure to a massive loss of advertising to the Internet, an almost monolithic pro-Democrat slant in news and editorial coverage and rising generations of non-readers that obtained what little news they required via TV, smartphones, or social networking, not newsprint.
Armstrong and his Patch startup team logically concluded that local news—largely ignored by dominant big-city papers eager to make their mark in national politics—might be better served up on a series of locally run and locally reported Internet sites. The idea was for locally based writers to provide breaking news of local events and politics that the larger papers would not or could not cover. In addition, local advertisers who could scarcely afford a column inch in larger papers would, theoretically at least, eagerly provide the revenue.
The plan seemed a good one. Initially, Patch grew its presence, if not its profits, almost exponentially. But by the time AOL acquired it, growth seemed to be running out of steam. Ultimately, the site never made a profit for its new owner.
Last summer, in a substantial corporate bloodletting, Armstrong was forced to start cutting at Patch, suddenly laying off at least half of its 1,000 employees last summer, leading to plenty of negative Internet chatter as many local sites attempted to cling to life-support. Armstrong had been promising AOL investors that Patch would turn a profit by the end of FY 2013. Obviously, that didn’t happen. AOL’s essential divestiture of Patch for a likely considerable loss is the result.
What really happened here? The answer would seem fairly simple, at least in part. The expected substantial advertising revenue never really materialized for Patch or, by extension, for AOL. What Armstrong somehow failed to notice is that advertising in all media has never again achieved its accustomed torrid rate of increase since the onset of the Great Recession.
Although business is allegedly on the rise again, a good deal of corporate profitability today is driven by stock buybacks, regular layoffs, and the increasing tendency of companies to either contract work out or hire increasing numbers of temporary employees. The goal is at least in part to evade potentially crippling long-term obligations, particularly pension obligations and the uncertain rigors of Obamacare, which is now legally in force.
In addition to these economies, another way companies can reduce expenses is to cut back on advertising, which a great many companies have done and are still doing. Advertising cutbacks remain particularly evident in small, local businesses. They can no longer justify the frill of overpriced advertising expenses in what, for them, has remained a poor-to-stagnant environment. While business is allegedly turning up at last, small, local businesses will likely be among the last to increase advertising expenses in any media until such a trend is confirmed for their own businesses.
The perniciousness and staying power of the local advertising downturn was likely unimaginable to Armstrong at the time AOL acquired Patch. But it has become painfully obvious now. As with much in business, it’s often a matter of timing. The trend can be your friend. But the advertising trend has not been with Patch. That’s not surprising, as advertising and the revenue it generates also remains elusive for much-larger Internet-based businesses, even the likes of Facebook and Twitter.
The second issue facing Patch is seemingly an odd one, involving an ongoing media reality unforeseen by many in the inward-gazing tech world: the continued viability and frequent prosperity of local newspapers and local newspaper franchises.
Even as big-city newspapers, including the New York Times and the Washington Post, continue to lose subscribers at an alarming rate, with a number of papers either folding or cutting back to less than seven publishing days per week, a surprising number of local rags are prospering, particularly in under-served rural areas.
One of few investors spotting this trend early is patient, stealthy Warren Buffett. The Sage of Omaha has been quietly buying up small local paper chains bit by bit in recent years. Virtually alone, he seems to have noticed the continuing affection smaller towns and rural areas have for their local papers, not to mention the black ink that many generate as well.
Usually weeklies not dailies, such local papers are still available for delivery by subscription—the old-fashioned model—as well as being stocked by grocery stores, drugstores, and small newsstands. Reporting on local news like high school team sports, business openings and closings, marriages, births and deaths, crime, weekend auctions and the like, these small papers remain a viable, traditional, go-to source for news and information.
And advertising. Without access to TV stations or large newspapers, or in some areas, even to broadband Internet, where else are small town and rural businesses to go to get the message out? Small, local AM radio stations can help. But local newspapers best fit the bill, particularly in their still-thriving classified sections where advertising space can remain amazingly cheap.
In a world dominated by high-tech solutions, personal computing, portable communication devices and useful apps, today’s Internet-savvy businesses and businessmen can perhaps be forgiven for failing to notice the continued existence and prosperity of living fossils like local newspapers.
But Armstrong’s and Patch’s underestimation of the real competitor for their new enterprise—the community newspaper—was ultimately the key reason behind this Internet venture’s ongoing collapse. Somewhat ironically, you’ll never see anything about this in the national business media, however. Either their overpaid sages weren’t paying attention to the situation on the ground. Or, more likely, they regarded small fry anachronisms like community newspapers as distinctly beneath their notice.
Warren Buffett, for one, hopes they’ll continue thinking this way, even as he continues to pocket his profits from the thriving, low-tech businesses that nobody bothered to notice.