AOL May Sell Patch or Deepen Cuts

AOL seeks profit from community journalism website Patch.

An Ipad user views AOL's 'Editions' news viewer seen here on a Patch page showing local news from Fairfax, Va., on August 21, 2013.
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Advertising sales increased 14 percent during the third quarter at AOL, and the company appears poised for reinvention, but its profits stalled in the period as it tries to salvage its failed gamble on a nationwide network of community journalists called Patch.

Community journalism platform Patch lowered costs because of layoffs and sought new partnerships,CEO Tim Armstrong said during the third quarter earnings conference call on Tuesday while promising Patch will become profitable by the end of the year.

Total revenue for AOL in the third quarter rose 6 percent to $561 million, up from $532 million in the third quarter of 2012. Costs, including the restructuring of Patch, caused AOL's income to drop 90 percent from $20 million in 2012, to $2 million for the third quarter of 2013.

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"We expect Patch will move to run rate profitability by the year's end through a combination of operational changes and a partnership model for operations or strategic alternatives," Armstrong said during the call.

AOL enjoyed great success as America Online during the 1990s, and has taken steps in recent years to revamp its strategy and brand by producing new content and trying new advertising methods. Patch began as a journalism startup in 2007 before its sale to AOL in 2009, after which the company grew to employ hundreds of freelance and staff reporters nationwide. The digital media company already cut Patch staff by half, to about 500 employees, in August.

More restructuring may be on the horizon for Patch. During the call Karen Dykstra, chief financial officer of AOL, said the company is looking for partners to help operate Patch or buy it.

"We continue to look at the cost structure and are committed to bringing the cost structure down by the end of the year," Dykstra said.

AOL's content arm Brand Group, which includes the Huffington Post and TechCrunch, is enjoying success overall. Brand Group reported an 11 percent increase in revenue compared with the same quarter in 2012. Huffington Post is expanding to nations including Germany, while TechCrunch conferences gather tech industry luminaries including Marissa Mayer and Mark Zuckerberg for candid interviews about the tech industry.

Despite the overall growth of AOL, restructuring costs for Patch continued during the third quarter, which brings into question whether the community journalism website is beyond saving, says Karsten Weide, a vice president for media research at International Data Corporation analyst firm.

"Patch for AOL is kind of like Bing is for Microsoft," Weide says, alluding to the search engine started by Microsoft in an attempt to compete with companies including Google and Yahoo. "They have put a lot of money into it but it does not seem to go anywhere."

The challenge for the company is to come up with a deadline for solutions and pull the plug on Patch if it cannot be saved, or put enough resources into it to keep Patch operating and avoid upsetting online users, Weide says.

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"The reason Patch failed is that it is really expensive to create local content at the scale where it makes sense to sell advertising for it," Weide says. "The basic idea was the right one. Nobody was really leveraging local advertising a few years ago, so Patch tried to create local content and sell local advertising."

It was admirable for AOL to invest in community journalism at a time when community journalism lacks investors, but Patch faces difficulties including a stretched workforce and lack of success attracting local advertising, says Joshua Benton, director of the Nieman Journalism Lab at Harvard University.

"I suspect there is probably a small business that could make sense going forward," Benton says. "It could involve fewer sites targeted in the most financially successful areas. It seems to be that Patch as it was conceived is not going to be the solution in every neighborhood and every city."

The potential for Patch was to bring community journalism to urban and rural areas that did not receive the same attention as well-off suburbs, Benton says.