Then, in a move that not even the most gossipy of media obsessives saw coming, Armstrong announced at the Super Bowl in Texas that AOL was buying The Huffington Post, the Internet news darling, for $315 million. Armstrong went from looking lame to looking awfully sharp. And awfully lucky.
Perhaps no online property was lusted after by media moguls like the one Arianna Huffington founded six years ago. Its traffic rivals The New York Times. Its infrastructure is virtually zero-cost. Its social media strategy is practically perfect. Oh, and it turned its first profit last year on $30 million in revenue. HuffPo expects to triple revenue by 2012.
"The Huffington Post was in big-time growth mode, and in theory this gives them access to the resources they'll need for even faster growth," says Andy Chapman, the head of digital trading at MindShare North America, a unit of the ad agency WPP PLC.
Huffington's original vision was to create the political left's answer to the right-leaning Drudge Report, minus the venom. When it launched in May 2005, The Huffington Post was derided as the plaything of a rich, Cambridge-educated political pundit.
Huffington leveraged her personality and her access to the elite's dinner-party circuit to lure 250 celebrities - "creative minds," as she called them - to blog about topics from business to the boudoir. Together with CEO Ken Lerer, she started the company with $2 million and not a day's worth of digital experience.
These were the earliest days of social media. At the time, seasoned media executives were scared to death of opening up their sites to the madding crowds. Journalism was a heavily filtered, one-way broadcast. Huffington somehow saw around the social-media corner. She sensed that people wanted a voice in the new national conversation emerging online. She persuaded everyone from Walter Cronkite to Diane Keaton to blog. For a paycheck of zero.
The model was laughably low-cost. To this day, the home page still looks decidedly low-budget and cluttered. Early on, Huffington's brainchild was also roundly panned. One early critic, New York University journalism professor Jay Rosen, said at the time, "Barry Diller doesn't have time to hunt down juicy links for his readers."
But Rosen's take turned out to be wildly wrong. Huffington's writers were heavyweights - and because readers could chime in, she immediately garnered a loyal audience of insatiable news addicts. Huffington sensed, perhaps more than anyone, that readers didn't just want to share news. They wanted to share it, comment on it and then put it up on their Facebook pages and Twitter accounts.
It wasn't long before HuffPo started serving as its audience's curator. Editors scoured the Web for the most scintillating content and then repackaged it on the site. Huffington also understood that on the Web, linking and being linked to is what makes traffic growth steroidal. At the same time, heavyweight advertisers were looking for exciting new places to drop their ads. This ad revenue enabled HuffPo to start taking in some cash, then use it to add staff.
The deal showcases the brutal environment for print newspaper companies in the iPad age. Unlike The New York Times, The Huffington Post doesn't have to pay for trucks to deliver the printed product. Nor does it have to pay hundreds of journalists to gather news the way big-city newspapers do. AOL is projecting a 30 percent profit margin for the site this year and expects to wring $20 million of cost savings by combining HuffPo with its own news sites. The combination will reach about 117 million unique visitors a month in the U.S., according to research firm comScore Inc.
But by aggregating - or sponging, as some call it - other news providers' content, sites like The Huffington Post, critics say, are poisoning the news revenue model and threatening the Fourth Estate along the way. The Huffington Post only has about 100 staffers, 90 percent fewer than the New York Times. But HuffPo benefits from all the journalists working for mainstream outfits by posting their content and running ads next to it. In other words, the HuffPo's success hinges on monetizing content other publishers pay for.
Last year, former Washington Post Editor Len Downie Jr. referred to news aggregation sites like The Huffington Post as "parasites living off journalism produced by others." The Wall Street Journal's editor-in-chief, Robert Thomson, drew a more specific comparison: "Tech tapeworms."
Huffington's site now gets 25 million unique visitors a month, rivaling The New York Times' 32 million. The Huffington Post is the classic case of what Harvard Business School professor Clayton Christensen calls the "innovator's dilemma." HuffPo was the side-show innovator that mainstream media executives didn't see coming. While they wrung their hands over whether to charge for online content, Arianna Huffington upended their business models.
AOL can use all the help it can get. The company is widely viewed as a dial-up dog, a relic of the days of the ever-present "You've got mail" voice. Of late, its media strategy has seemed schizophrenic. In buying The Huffington Post, AOL is also buying Arianna, who will assume the role of editorial content overlord. For the first time in its history, the company will have an executive who understands how online content works.
Recently, The Huffington Post has been on a hiring spree, poaching Newsweek's senior Washington correspondent, Howard Fineman, New York Times economics writer Peter Goodman and Times business editor Timothy O'Brien. Outsell Inc. media analyst Ken Doctor says the AOL deal could be a prelude to even more recruiting.
"If you want to hire high-end talent, you need to have the cash to do it," Doctor says. "It's been a fast-growing startup. Now it can be a fast-growing, major digital media company."