02.07.11

AOL's Tricky HuffPo Marriage

The company’s emphasis on traffic complicates its $315 million deal with Huffington Post. Dan Lyons on why this signals a new media era—and could mean a big jump in ad rates.

It is no surprise that AOL is buying Huffington Post. Last summer I spent some time with Arianna Huffington and her team as I was preparing a profile for Newsweek and even then it was clear that they wanted to sell the company. Huffington and her partner Ken Lerer had raised $37 million in venture funding, much of it from Softbank Capital. In June 2009, as Softbank grew impatient for a return, the VC fund had installed Eric Hippeau, one of its partners, as CEO of Huffington Post. In our conversations, Hippeau talked about how he was determined to build a “strong and independent” business—which in the world of tech and media is code for, “We’re for sale.” Now, sure enough, as soon as the deal with AOL was announced, Hippeau announced he was skipping out to join Lerer’s investment firm. In other words: My work here is done, people.

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No doubt Hippeau and Lerer and Huffington were drinking champagne last night, but the truth is, this deal is not a victory for either side. It’s a slow-motion train wreck and will end in disaster.

Listen to Nick Denton, who runs Gawker, which now becomes the biggest independent Web-based news outlet. “I’m disappointed in the Huffington Post. I thought Arianna Huffington and Kenny Lerer were reinventing news, rather than simply flipping to a flailing conglomerate,” he told me.

Denton insists he has no intention of ever selling Gawker, and he seems not-so-secretly pleased to see his opponents cashing out: “AOL has gathered so many of our rivals— Huffington Post, Engadget, Techcrunch—in one place. The question: Is this a fearsome Internet conglomerate or simply a roach motel for once lively websites?”

Nick Denton asked the question: "Is this a fearsome Internet conglomerate or simply a roach motel for once lively websites?”

One big problem with the deal is that Arianna Huffington now runs editorial for AOL properties, which include tech sites Engadget and TechCrunch. Those sites are both accustomed to being free-wheeling, fiercely independent and fiercely competitive—so competitive, in fact, that recently they’ve been battling with each other.

Michael Arrington, who runs TechCrunch and just sold it to AOL a few months ago, is an abrasive, big-ego, sometimes obnoxious guy. He’s a friend of mine, so I mean this in the best possible way. But I can’t imagine him working for Arianna.

Howard Kurtz: HuffPost’s Gutsy Move

Randall Lane: Arianna Cashes Out

Details on the Deal
The other, bigger problem is AOL itself. AOL touts itself as a media company, but as Ken Auletta reported in The New Yorker recently, most of what AOL publishes is junk, and 80 percent of its profits come from a rather seedy little business—charging subscription fees from longtime users who don’t realize that they no longer need to pay for AOL service, and could be getting it free.

The other problem is that AOL’s chief executive, Tim Armstrong, is a sales guy. He ran sales at Google before he came to AOL in 2009. Nothing wrong with sales guys, except when they start telling people how to do journalism. Sales guys deal in numbers. But journalism is about words. Sales guys live in a world where everything can be measured and analyzed. Their version of journalism is to focus on things like “keyword density” and search-engine optimization.

Journalists live in a world of story-telling, and where the value of a story, its power to resonate, is something they know by instinct. Some people have better instincts than others. Some people can improve their instincts over time. The other part of storytelling is not the material itself but how you present it. Some can spin a better tale out of the same material than others.

But no great storyteller has ever been someone who started out by thinking about traffic numbers and search engine keywords.

Much of AOL’s dysfunction was laid bare just one week ago when Business Insider, a blog, got hold of a leaked AOL memo called “The AOL Way,” which purports to instruct AOL’s hacks on how to practice their craft. It’s all about making stories based on traffic potential and profit potential. It’s all about numbers—and volume. It’s a depressing, sickening, embarrassing document. AOL’s hacks are expected to write five to 10 articles a day—which put me in mind of the scene in Ben-Hur where the slaves are put to work rowing a Roman warship, and their Roman master tells them, “We keep you alive to serve this ship. So row well, and live.”

Business Insider quoted one AOL “journalist” as saying, “AOL is the most fucked up, bullshit company on earth,” and then adding that joining AOL was “the worst career move I’ve ever made.”

Now all those bright young things with the glamorous job of writing for the Huffington Post are being sent down into the belly of the AOL galleyship and assigned to an oar. Row well, kids!

The big problem that everyone in online media faces is that advertising rates keep falling. Advertisers simply are not willing to pay as much for online ads as they will for ads on TV or in print publications.

One response to that has been to say that if each page is worth less, then we must have more pages. Thus we now have “content farms” like Demand Media which flood the Web with low-cost, low-quality content that is basically spam. But this drives advertising rates down even further.

Last summer when I did my article about Huffington Post for Newsweek, I estimated that they had about 25 million monthly readers and would generate about $30 million in revenues in 2010. That meant they were getting a mere $1 per reader per year!

Compare that to the world of cable TV or print newspapers and magazines which collect hundreds of dollars each year from each subscriber, and then generate hundreds of millions in ad revenue on top of that—and you see the difficulty of the business that AOL and Huffington Post and all the rest of us are in.

But here lies the bright spot in the HuffPo acquisition, and the probable reason for it. If the problem is that we have too many organizations chasing after the same ad dollars, why not roll everyone up and give advertisers fewer choices? Then we can bump the ad rates up. It worked in broadcast TV, when we had three big networks and they operated an oligopoly.

“The age of the Internet content roll-up has begun, all in a desperate effort to pump up CPMs [i.e., advertising rates] and let Internet content reach at least a shadow of the profitability of traditional content,” says Michael Wolff, editorial director of Adweek Media.

Dan Lyons is technology editor at Newsweek and the creator of Fake Steve Jobs, the persona behind the notorious tech blog, The Secret Diary of Steve Jobs. Before joining Newsweek, Lyons spent 10 years at Forbes.