Analysis: AOL lurches for a content strategy

NEW YORK Mon Oct 18, 2010 2:26pm EDT

AOL Inc. Chief Executive Tim Armstrong gives an interview on the floor of the New York Stock Exchange, December 10, 2009. REUTERS/Brendan McDermid

AOL Inc. Chief Executive Tim Armstrong gives an interview on the floor of the New York Stock Exchange, December 10, 2009.

Credit: Reuters/Brendan McDermid

NEW YORK (Reuters) - Just three weeks ago, AOL Inc (AOL.N) Chief Executive Tim Armstrong promised no more "hail Mary passes" like its deal to buy Time Warner, now considered the worst merger in history.

Instead, it looks like AOL, which Time Warner Inc (TWX.N) spun off last December, is setting up a 65-yard field goal. It and private equity groups are considering taking over Yahoo Inc (YHOO.O), its much bigger rival, valued at more than $20 billion.

And that's before he revives AOL. Since Armstrong took the helm last year, AOL has been immersed in a blur of launches and acquisitions as the company tries to erase memories of a lost decade when Yahoo, then Google (GOOG.O), sailed past it in revenue and relevance.

Armstrong's goal is to transform the creaky Web company into the Internet's premier journalism and entertainment destination, but without spending too much money on speculative acquisitions.

"There will not be a Bebo in AOL's future," Armstrong told Reuters in late September, referring to the $850 million purchase of the social networking site that AOL dumped in June at a loss.

It could be tough to get there.

"I think they are throwing a lot of things up against the wall," said Citigroup analyst Mark Mahaney. "It's the right general strategy, it's just a very risky strategy."

Former AOL executives said Armstrong's scattered approach to making money off a variety of content strategies makes it seem like the company is lurching from one project to another.

Resources once dedicated to original brands and content, such as AOL News, have been diverted, ex-employees say.

"It is so diffuse and chaotic," said one source, who recently left the company, and declined to be identified for fear of reprisal.

FROM PULITZERS TO PATCH

At the end of last year, AOL touted its more than 500 journalists, among them nine Pulitzer prize winners and two voters who pick the Heisman Trophy, awarded each year to U.S. college football's best player.

This year, AOL turned its attention to Patch, which enlists journalists around the United States to oversee freelance contributors who report on local news nearly block by block in their neighborhoods.

AOL plans to funnel $50 million to build up to 500 community sites by the end of the year.

It could take several years before AOL will see returns from Patch, if it ever does.

"Patch is coming into a tough place where there is already some media and a lot of folks already have their channels where they get information," said Kip Cassino, executive vice president of research at Borrell Associates, an online consulting firm that specializes in local advertising.

The recent purchase of the technology blog TechCrunch for a reported $30 million is another move that raised questions about its strategy so shortly after declaring itself the biggest recruiter of veteran journalists.

"TechCrunch was a surprise," said Sacha Xavier Reich, partner at the advertising agency Neo@Ogilvy. "It's not a huge site. I don't think they acquired it for traffic but for connecting themselves to that type of user."

Then, there is Seed, AOL's answer to Demand Media and Yahoo's Associated Content, which generates story assignments designed to seize on popular topics and words that make them appear high up on the first page of Web search results.

These topics, such as "How I met my future wife at work" are produced cheaply by thousands of freelance contributors.

AOL defended its strategy, arguing that content, no matter the source, remains the focus.

"We don't believe the content on the Web will only be created within our walls, let's be clear about that," said David Eun, president of media and studios at AOL. "A lot of great content is created originally within our walls ... It's our job to bring the best out there and mix it internally so our audiences get the benefit of both."

ADS, TRAFFIC DECLINE

Armstrong's strategy has yet to pay off. Traffic at AOL has fallen 5 percent this year to about 105 million monthly unique readers, according to comScore. People visiting AOL news dropped off about 11 percent to 29 million uniques during the same period.

Advertising revenue at AOL plunged 27 percent in the second-quarter though the company warned about declines due to an overhaul of the sales structure.

Still, during the same period Internet advertising revenues overall in the U.S. jumped 14 percent, the highest second-quarter revenue on record, according to the Interactive Advertising Bureau and PwC.

AOL ad sales even underperformed newspapers, where Internet advertising rose 14 percent.

"(AOL) is a company that within a matter of months it will be eliminated from the surface of the Internet," said Trip Chowdhry, an analyst with Global Equities Research. "It's not adding any value whatsoever."

Other analysts have not yet written off AOL and advertisers on Madison Avenue are prepared to give it more time.

"What AOL and others are doing is leveraging technology to reach a broader community," said Chris Actis, senior vice president, group director at MediaVest.

Advertisers are betting that AOL's new advertising system, Project Devil, is appealing because of bigger, cleaner formats and the ability to interact within the ad without leaving the page.

"We love Tim," Bant Breen, CEO of Reprise, a search and social marketing agency. "The issue is the speed of making it happen."

(Reporting by Jennifer Saba. Editing by Kenneth Li and Robert MacMillan)