Just when you thought you could finally put Superbowl commercials behind you and go to bed in a beer-induced slumber, AOL dropped a late-night bomb: it bought The Huffington Post for $315 million, of which $300 million is in cash. My first reaction –- wow! I had called for HuffPo being acquired by MSNBC before the end of 2011. But then those are the perils of the prediction game. The acquisition is not a surprise, considering AOL has been on a buyout rampage.
“Our strategy is to invest in as many brands as we can: brands that cut across devices and distribution channels,” AOL CEO Tim Armstrong told me in a conversation last year, “We will use M&A if we believe that is what is needed and it helps us get brands and helps expand our platforms.” HuffPo buyout is just that. Or what my dear friend Pip Coburn (an investor) would call yet another CEO promise of future bliss.
But when you get over the initial ka-pow reaction and start thinking about the deal, not everything adds up. Here is my breakdown of the deal.
1. The Return of The Eyeballs
First AOL snapped up our friends at Techcrunch. Now they have acquired Huffington Post. In between those two events Demand Media went public and is now valued at around $1.6 billion, about $800 million shy of AOL, which is valued at $2.4 billion.
Of course, there was also Yahoo buying Associated Content and Newsweek merging with the Daily Beast, but let’s leave them to their own devices for a moment. AOL has also bought other eyeball-centric companies such as GoViral. These deals are a clear indication that as more and more ad dollars shift to the web -– $28.5 billion in Internet advertising in 2011 –- the eyeballs and (by extension) page views are getting attention in the marketplace.
It wouldn’t surprise me to see more such quick-let’s-add-some-page-views-to-our-arsenal deals. It wouldn’t surprise me to see Huffington Post’s main — and perhaps better — rival, Politco, get acquired over the next twelve months. I would predict MSNBC as a likely candidate to acquire them.
2. Arianna Goes To The Bank. Laughing!
Huffington Post was valued between $300 million to $450 million in 2010, according to Bloomberg. In that story that ran on December 14, Huffington said: “It’s working. Everybody’s happy with how it’s going. Nobody is in a hurry to cash out.” Ironic, considering that was around the time Armstrong was trying to buy the company.
For Huffington and her partner and investors, this is a sweet deal. Why? Because they are selling at the top of the market! The Huffington Post (and TV political commentators such as MSNBC’s Keith Olbermann) tasted success during a special kind of political climate, just as their rivals Fox and its commentators. The political (and economic) mood in the country is vastly different now, and who knows if the Huffington Post can keep up the momentum.
The numbers tell a part of the story. Quantcast, which measures the Huffington Post’s traffic, says it gets about 40 million people a month, and over past six months it has slowly been gaining a new audience, but has seen its page views drop from 600 million a month to 437 million in January 2011. The page views per person have declined by half. Even monthly visits per person are trending down. (update: see below)
According to some estimates, HuffPo did $31 million in revenues for 2010. At 500 million pageviews a month, the company is bringing in a little more than a $1 per user per year. Arianna did the best thing – locked in her profits. What more, she gets to be the editorial figurehead for the new American Media Company.
3. For Armstrong, No Time To Lose
Tim Armstrong, AOL’s CEO has little or no choice but to make this and more bold moves. His company is racing against time. He has articulated a very content-centric strategy. In a recent article in The New Yorker (subscription required), Armstrong pointed out that since the Internet was a chaotic place, AOL would prove to be the filter and provide information that was crafted by its editorial production line. I use the phrase editorial production line mostly because a recently leaked AOL internal strategy document is all about journalism on a low budget.
He wants AOL home page to be the start page for information, but unfortunately it is not going to happen – the world of today doesn’t work that way. People have their favorites and start their news day at random places. And then there is the whole Patch effort to rule the local market – which apparently loses about $30 million a quarter and they are about to ramp-up spending on Patch sites from $75 million a year to $160 million a year. Guess how that is going to work out.
AOL’s moves are much like the ending scene from Butch Cassidy and The Sundance Kid. Surrounded by the Bolivian Army, Dos Hombres have no choice to make a gallant dash to their horses, guns blazing, hoping against hope as thousand guns blaze around them. The ever-increasing web inventory is like the Bolivian Army firing on AOL and others who have not yet come to terms with the futility of chasing page views.
Despite what you might read in the newspapers and blogs, AOL is still in A-O-Hell. In the most recent quarter, the company saw its advertising revenues go down 29 percent, at a time when online advertising grew about 14 percent. According to eMarketer, its share of total online display advertising was down to 5.3 percent in 2010 from 6.8 percent in 2009.
Display advertising tanked during the last three months of 2010 – ironic since holiday season is viewed as one where brand advertisers open their checkbooks. I wonder if adding more page views from HuffPo is only going to exacerbate these problems in the coming quarters. (Mathew Ingram wrote about AOL’s growing headaches earlier this month.)
In a chat with The New York Times, charming and always quotable Armstrong quipped “I think this is going to be a situation where 1 plus 1 equals 11.”
Let’s not get ahead of ourselves, for in this case one plus one ends up equaling none – as we might soon see!
Update: In an email, Mario Ruiz a spokesperson for HuffPo argued that it was Quantcast that was making a mistake when it came to monthly pageviews and that there were two different views into the monthly pageviews. I am investigation this weird situation further. In the interim, here is a graphic HuffPo shared with me.
Related GigaOM Pro content (sub req’d):
66 thoughts on “AOL+HuffPo! Why It is Not Really a Good Deal”
Brilliant there in your final flourish. “Desperate” is the word that came to my mind. On “Guess how that is going to work out” – I saw this movie once before. Disney started a portal/content network called GO in the late ’90s, at the dot-boom peak. I was part of it for more than a year. Helped them burn a BILLION dollars before the original-content-channels network was shut down, 400 of us laid off, and it all went to automated repurposing of other Disney content. Talk about mistakes that are hard to extricate yourself from … note the Disney sites that are still on the “go.com” domain, to this day. Why, in fact, if we consult the history books, we’ve just passed the 10th anniversary of that debacle.
I am working on a follow up post as well. I think you are right — this is some of that thinking that has come into play, though I think on a larger canvas.
As Einstein once said: “We can’t solve problems by using the same kind of thinking we used when we created them.”
No, but we can take advantage of the same structural flaws time and again to personally benefit at the expense of social value.
You just have to marvel at the market harvesting machinery that is AOL… the profiteering continues!
Sorry, I don’t find your argument at all persuasive and in fact, it’s a bit contradictory.
You say AOL is “buying eyeballs,” but then say that page views at Huffington Post are declining. You say that Arianna got a sweet deal, but then submit that the valuation was well within the range of what analysts predicted.
I, for one, certainly don’t know what Huffington Post should be valued at, but I do know that it has something to do with discounted future earnings based on reasonable assumptions.
Reportedly, the site expects to take in $100 million next year. Assuming a quite reasonable 20% margin, that would mean AOL is getting a great property for about 15x forward PE.
Again, I’m not at all certain that is the case, but simply assuming Tim Armstrong (by all accounts a very smart guy) is making a “gallant dash to their horses” is jumping the gun a bit (pardon the mixed metaphor).
One thing is interesting. Despite the eye-popping valuations, it seems to be reasonably easy to find strong financial justification for them. I worked the numbers a bit for Facebook, and $50 billion actually looks cheap:
Since I wrote it, the reported numbers have actually improved on my initial assumptions.
So, I wouldn’t be so certain that AOL “bought at the top.” I’m sure valuations will eventually get out of hand, but we’re still near the bottom of the cycle and prices will rise considerably from here.
If things were going swimmingly well, wouldn’t the company sell at the top of the range of its valuation versus the lower end of the valuation. I don’t think my argument is contrary. What I am saying is pretty simple_ eyeballs are in vogue again, arianna is happy she is getting $300 million and chance for her site which is seeing declining viewership and essentially she wins because AOL has a flawed strategy which is extremely near term. As for AOL jumping the gun — just look at their advertising sales. This is a company that has failed to monetize its current page views, so how are they going to monetize what they are buying now.
Okay, but even conceding all of those points. That Arianna was hot to sell, that AOL has a flawed strategy and is performing extremely poorly, none of that means that it’s not a good deal.
I don’t have any inside knowledge of financials of HuffPo, but if the $100 million figure is even close to accurate, it looks like it makes a lot of sense.
Moreover, HuffPo isn’t mere “eyeballs,” but pretty valuable inventory.
As for selling near the bottom of the valuation, it’s tough to say, without seeing the employment contract. The deal was almost 100% cash and it’s safe to assume that Ariana will get a sweet options package.
And in reality, their daily battles are with the Daily Beast as much as Politico. In a sense, why all three are ramping up hires at the content creation end of the process.
I think they’re less concerned with numbers from the last quarter – which didn’t even get it that January retail sales would exceed December for practically the first time on the planet – than what they may achieve with advertising marching out of the Great Recession.
They are getting about $1 per user per month — not very valuable inventory. Secondly, they are going to have to spend on content — all those free articles are not going to continue forever.
I am just highly skeptical of this deal.
That’s true, but they just got their sales team in place. News content usually sells for pretty good rates.
Anyway, time will tell…
Thanks for a thought provoking post and a great discussion.
You bring up some very insightful points (as usual), Om. But I’m not sure I agree with you entirely on this one. Look at the high level goal for AOL – selling premium display advertising against content. Huffpo has the brand, the content width and depth and People Magazine, The Economist, Wall Street Journal etc, are not exactly for sale…2
I think if you look at $1 a month per user, HuffPo is no Economist or WSJ or People magazine. It is essentially a content factory with some nice products. Sort of like K-Mart with Martha Stewart line-up of products.
I am not even sure I would refer to it as a “content factory”. The bulk of the site is aggregated content from 3rd parties, followed by a slew of link-bait articles and a sliver of original content (created by unpaid contributors).
I am not smart enough to speak to the pricing side of the equation, but strategically, I think that this is very smart. AOL is looking for cheap content meets relevance and integration, and Huffington Post is it.
For a lot of people (myself included) Huffington Post is part of their daily online travels. It certainly doesn’t take the place of the best that the blogosphere has to offer, but then again, it doesn’t need to. It’s utilitarian and fun.
It has the potential to be the CNN of the online era, I think.
Just because Yahoo, lacked the culture to execute a unified content and services value proposition, doesn’t mean that the idea has no merits.
Nor is it a given that Huffington herself aspires to ride off into the sunset. Given Armstrong credit, he has brought some good, strong people into his staple.
Whether he can execute against that, remains to be seen. AOL has always been a story of, “Can he get the plane to take off before it runs out of gas (i.e., the legacy business).”
That’s what I thought. All this journalism about journalism, replies to replies. In an era where everyone’s desperate to sit at a computer and turn their ingenious opinion into dollars, hats off to Ariana for doing it. So what if she could have got $400m or $10m, either way she gets to chill in a hot tub for the rest of her life soaking her liver in red wine. That’s my opinion, and my current valuation remains at zero; there’s no justice!
So . . . does this mean we now know where Olbermann is going?
Not to AOL 😉
I completely agree with you OM!
‘The political (and economic) mood in the country is vastly different and who know if the Huffington Post could keep up the momentum.’ should be : ‘The political (and economic) mood in the country is vastly different and who knows if the Huffington Post could keep up the momentum.’
*Just thought I should point it out. Good article by the way.
I’m curious what this will mean for the sites like TechCrunch which touted that their editorial license would be unchecked by AOL? If Huffington, and her practices as Editor and Chief, become the norm for the entire network, wouldn’t this also affect TC?
I’m sure Tim Armstrong won’t want one of his best brands to languish on its ad-potential by not churning out 15 stories a day.
So will Google be converted into PointCast (involuntary) by these new media companies? Seems like they all depend on Google for mass distribution.
AOL’s acquisition of HuffPo is smart — and a reminder again of the shift toward in-demand reporting. Sad news day!
Ever looked at where those millions of page views on HP are going? HP traffic is mostly celebrity nip slips, misleading headlines and whatever Jon Stewart did last night. I enjoy HP as much as anyone. I visit daily. But there isn’t much there, there. It doesn’t justify a valuation anywhere close to $315mm. So kudos to AH for cashing out while the getting is good.
Politics won’t go away. They’ll have stories to write.
You lost me on this one. Is Huffpost NOT an attractive property because it has an established audience? The “futility of chasing eyeballs” and the comment about display ad business woes seems odd to me, do you see web users paying out of pocket for anything?
Last time I checked chasing eyeballs and display ads are pretty valuable to facebook. And the home+news is the only thing keeping Yahoo afloat. And thats a lot of float (diminishing due to mismanagement admittedly)
Are you suggesting huffpost would make a better facebook app?
Good take on Politico/MSNBC. Comcast’s neoconservative management is moving MSNBC to the right and Politico, the voice of the Washington establishment, will make a perfect fit.
I agree that this is ingenious – for Arianna Huffington. She gets to unload her website and make a good chunk of money before HuffPo becomes obsolete and goes into decline, as it almost inevitably will. It doesn’t really offer any unique commentary or content (serious or otherwise, and they draw most of their eyeballs through celebrity and gossip stuff), which means they could get knocked off fairly easily over the next couple of years.
You’d think AOL would be smart enough not to fall for their own scam. They pulled the same thing on Time Warner with the merger ten years ago, selling out just as the company was becoming obsolete.
I’m not clear on who this is a bad deal for? Is it bad because both have declining traffic?
One thing that this deal does is it sets a value on the HuffPo that could potentially be used to value other online properties and that makes things interesting because you can assess the risk of similar investments and new startups…
As Om said, lots of reasons why Huff Post would sell at this price – flat/declining page-views, declining visits-per-user (ref: http://bit.ly/hRxBsB ), loss of motivation on American left, great valuation, view-advertising is “hot”, etc. etc.
But – AOL’s model here is based on a notion of content aggregation that is dead now. Aggregation can still happen, but not this way.
Oh Om, don’t be so cynical. Arianna is no dope, and I am happy she gets to cash out. But AOL has such a large entrenched brand among people outside the bubble that if she sticks around and helps them with both local and international growth, she can make a real difference. See my own theory from early this morning: http://blog.stealthmode.com/2011/02/why-huffpos-sale-to-aol-is-different-a-woman-co-founder/
She is no dope — running out and cashing her check makes her one of the smartest people in the media industry right now. How many new Internet media millionaires are out there now? 😉
If you really believe that AH was the reason HuffPo grew then think again. AOL just fired the executive team that made HuffPo rock. 😉 So no, I have no faith in the deal at all.
If AOL is spending $75 million a year on Patch sites, how can they be losing $30 million a quarter, or $120 million a year, on those sites?
They have increased spending to $160 million a year on Patch. So that is why the quarterly losses are up!
A fool and his money … but who left AOL with 315mn$?
Like we’ve seen with Digg and Del.ic.io.us, aggregators like HuffPo have a limited shelf life. The site has lost some of its original appeal as RSS tech has got better (think feedly). Sweet deal indeed for Arianna, who remains a savvy marketer to a limited base.
Wow, for those who think this is a payout to a group of Leftist activists, note that the deal will offer up a huge chunk of change to Andrew Breitbart, who was one of the founders.
This is exactly the best time to buy a politically oriented site; during the trough of domestic political attention after a mid-term election. Traffic can only go up from here and, now that corporations are free to spend unregulated funds on ads, HuffPo’s problem will be coming up with enough inventory to meet advertiser demand.
Every week that went by, for 1-2 years now, HuffPo devoted one more square inch of the front page to trashy celeb gossip and porn news. Add to that more and more pop-up and embedded ads, to the point where clicking anywhere on the site outside the script leads away from the site.
This had to contribute to the loss of page views and the demographic change. If anything, it’s what made them attractive to AOL. Willingness to sell crap over content if it brings revenue.
I don’t think anyone looked to the HuffPo for anything groundbreaking, but it provided a fairly moderate counter to the ideological scrubbing that FOX uses on facts. They squandered that by trying to lure in readers with trash and lure it’s writers to write for free (which isn’t exactly a boost to journalistic integrity.
You said that right, bro. That and those interminable slide shows which will suit AOL’s dial-up business to a t. It will be back to the world wide wait.
Excellent artticle. I’ve been studying Tim Armstrong’s activities in his quest to harness the Internet as means of distribution and purchase of video content. He bought a company that supposedly is a network of freelance creative and production talent. Why this would be unique outside the professional networks of writers, art directors and production talent is beyond me. Seems a bit late in the game.
When you mention a reduction in display ads, having myself made a living as a commercial producer, it seems the way to compete for those eyeballs is with video ads. Wall Street Journal was first out of the gate with their own web show supported with ads.
AOL/Huff Post will have to invest a lot of capital to make the liberal news source a go-to all-in-one purpose site.
Niche marketing and transmedia will be the trend to watch, and I see the media giants in a much better position to fund and launch these boutique web sites.
Could not agree more that they have probably paid too much for the site. I just think consumers are getting smarter by the minute and all these content farms with content squashed in to a tiny box in the middle of the screen and sharing buttons, ads and affiliate deals all over the place is just not that appealing. Give it a year and Techcrunch will look like Huffigton post does now. I can see AOL taking these sites down the pipe leaving a nice niche for the next batch of Techcrunch and Huff Posts to come along and kill it with real honest content that people want to read.
Fantastic as usual Om. I’m wondering how long will AH stay on-board, and do you know if the content will be effected?
Politico ? A rival of HuffPo ?
Politico isn’t even considered a serious news source.
The main thing that I want to know is, when they say that Arianna will become the editor of AOL media, meaning that she will retain editorial control of HP, is that a lifelong appointment; will she get to choose her successor? As long as she remains in control of the Post, to me it retains its integrity. If the AOL honchos ever take control of the content on HP, then it will just be another part of the MSM.
As far as the “red tide,” I don’t necessarily see it as a bad thing to bring together people of widely differing opinions on one site. The problems could come if there are discussions that are specifically relevant to one group of people, and trolls start coming in and disrupting it. I hope that there will be (or already is) some method of preventing that, so that, basically, if people in the same general camp are attempting to debate the subtleties of an issue, they won’t be interrupted by people trashing their entire political philosophy.
God, I hope they buy you and your personality cult out too. And take Gawker and Mashable with you. That way, you can learn from the master of trash tech journalism himself, Michael Arrington.