AOL's parish pump sites still not a Patch on what they are supposed to be

Nov 8, 2013

AOL's CEO, Tim Armstrong, has a fixation with the Patch local news and human interest stories service for small town America. He is dedicated to it but it has been, and still is, losing money hand-over-fist despite his repeated promises that the network would either be making a profit or even breaking even by the end of this year.

It is now evident that won't happen, which is perhaps why Mr. Armstrong, after yet again affirming his faith in the Patch network, left it to his CFO, Karen Dykstra, to deliver the details of the bad news.

At its inception Patch operated in 23 of the United States of America and the sites were expected to become self-funding and self-sustaining via a mixture of local and national advertising.

Mostly that didn't happen and, back in August this year, AOL was finally forced to face reality and acted to cut the network from 900 to 600 sites. More than 500 employees lost their jobs as a result and AOL began to restructure the business. The costs of that restructuring (US$19 million and rising - with an additional $25 million in "non-cash asset impairments" also thrown into the the mix) are still weighing heavy on AOL's bottom line.

When AOL's Q3 figures were announced they showed that net income plummeted by 91 per cent to $2.0 million. Nonetheless, Tim Armstrong was upbeat about the prospects for Patch stressing that the business has "improved revenue on key talent". He added,"We expect Patch to move to run-rate profitability by year’s end,” thanks to “restructuring and product changes".

Well, something had to happen. Earlier this year Patch was burning through $40 million a month. Ms. Dykstra announced that the restructuring has reduced costs by $10 million, but that is not enough and AOL says it is looking for partners to help it run (and fund) the so-called 'parish pump' sites. Dykstra admitted that if no volunteers step smartly forward, cheque books in hand, AOL will be forced to sell Patch sites on a "national, regional and local levels" She added, “We are committed to either a partnership of some kind of model or a transaction by the end of the year, bringing Patch to exit the year at profitability." Oh look, pork on the wing. You don't see that very often.

AOL revenues for Q3 were $561.3 million, up 6 per cent year-on-year thanks to a big increase in lucrative premium video-based advertising. However, the travaills at Patch cut net income to just $2 million for the quarter.

That said, and desspite the bad headline news, AOL is basically in a strong position thanks its canny acquisition of the sales advertising company, Adap.Tv. As AOL's Q3 figures show, the underlying trend iin the video advertising market is up and will continue to be up. AOL says the sector will grow by more than 40 per cent in the next 12 months.

Analysts and the market duly tut-tutted at the Patch restructuring costs but concur that AOL seems to have a bright future and, as a result, company shares rose by 8 per cent to $42.11

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