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AOL Buys Huffington Post: 3 Reasons It's a Big Mistake

A week ago, AOL (AOL) was hot to implement CEO Tim Armstrong's plan to ramp up production and turn the company into an SEO chomping machine. Last night came word of the secret plan: Buy the Huffington Post for $315 million, $300 million of which is cash.

The move answers some questions, like how AOL will get staff to write 5 to 10 stories a day. HuffPo's largely free labor model will artificially boost productivity, and the site's SEO pandering -- Jack Shafer at Slate called HuffPo's headline about the Super Bowl, below, the "greatest example of SEO whoring of all time" -- will boost traffic. And yet, big questions remain, like whether AOL can turn media titillation and brand buzz into profit. In the long run? Nope. There are three major areas where this deal falls short and could turn it into that other famous media deal disaster, when AOL merged with Time Warner.

1. Stuck in lefty limbo Armstrong and HuffPo co-founder Arianna Huffington waxed rhapsodic to Kara Swisher of All Things Digital. They swear that HuffPo's liberal branding won't get in the way. People will perceive that coverage moves to the center. Yeah, and the Steelers will win the Super Bowl last night.

HuffPo has gained a big audience in no small part because of that tilt to the left, no matter how much Huffington wants to say that she's brought in other viewpoints. Here's an anecdotal yet accurate test. Think of people you know who post links on social networks. Has a single one who is conservative ever referred to a HuffPo link without sarcasm or derision? To lose its slant is to lose audience, and no one will believe that the slant is gone.

AOL doesn't have the same public perception. Its prejudices and peccadilloes are, at worst, the ones you might associate with the various niches it covers. But remember that leveraging HuffPo's audience will mean moving content to the AOL site and re-branding it. That could drive off some regular AOL readers who aren't comfortable with overtly political writing.

2. Who's driving the bus?
So what is the company's brand? From the All Things Digital interview, it sounds as though talks started in November. Huffington will become editor-in-chief of the entire operation. And yet, Armstrong wanted to double AOL homepage traffic last month, and, according to (AMZN), AOL is still significantly ahead in traffic:

Who will really be in charge and how do the two sets of contributors come together? Even though thousands of writers on both sides are either unpaid or only meagerly compensated, the acquisition must still manage all of them. The two must combine properties -- otherwise, how will Armstrong get his huge short-term boost to AOL's numbers?

And yet, the move seems contrary to the acquisition of TechCrunch, which relies far more on breaking stories and dominating coverage in the tech area than it does on chasing SEO topics. In fact, most of AOL's properties have niche focuses. That's a strategy of not simply following SEO dictates, but diving deeply into topics, rather than just aggregating content from other sites.

There is a subtle but profound difference in the two philosophies. Can they work together? Maybe, but it's hardly a given.

3. AOL can't afford it
Of the price, $300 million is in cash. AOL's most recent balance sheet shows $802 million in cash and equivalents at the end of December. Which is fine, except that the business lost $782.5 million.

Total revenue for the company was $596 million. But $235.9 million of that -- and probably the big part of the company's margin -- was the dying dial-up subscription business. Factor that out, and the cash price alone was close to all AOL's advertising revenue last year. HuffPo brings an estimated $60 million in revenue, so it's not close to making up what AOL is losing.

Furthermore, publicly-held AOL can't afford Arianna Huffington and her lavish spending reputation. If things go wrong, she's free to just walk away and do something else.

The combination of bleeding money, fading revenues, and being public is a good combination for disgruntled investors and a new CEO within the next two or three years. Acquiring HuffPo won't fix that situation.


Top Image: Huffington Post.
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