Monday, February 07, 2011

AOL's Huffington Post Deal Ditches its Red State Customer Base

A few moments after Sunday's Super Bowl ended, AOL (AOL) announced the $315 million purchase of Huffington Post (HP). In July 2006, AOL announced it would abandon the business of charging for Internet access and try to make up the difference by selling advertising. Through its HP buy, AOL is admitting that this strategy failed. But that's because AOL has been running away from its Red State customers over the last five years, and HP, with its left-leaning approach that garnered 25 million unique visitors, $31 million in 2010 revenues, and $50 million in projected 2011 revenues, is likely to persuade even more of those Red State customers to end their business relationships with AOL. The question is whether HP's totally different customer base will make up the lost revenues.

This Red State customer legacy comes as no surprise to me since I have been writing for AOL's BloggingStocks and DailyFinance for roughly the last five years. I have not found any rigorous analysis of AOL's customers' political views, but this AOL poll of its users that ran a few months before the 2008 election -- finding 68% support for McCain and 37% for Obama -- suggests that AOL users are more Republican than the average American (Obama won 53% of the 2008 popular vote).

User comments on posts also suggest this may be true. My recent posts addressing matters related to politics, attracted vitriolic anti-Obama comments (here's an example from a post I wrote discussing last December's tax compromise). And the comments on David Schepp's Feb. 7 DailyFinance round-up of media reaction to the AOL/HP deal reflect the AOL customer's sense of abandonment in the wake of the announcement.

The media business has a fairly simple economic model based on selling to two sets of customers: readers and advertisers. If AOL wrote content that would appeal to its Red State readers, then it might increase its audience within that segment and then be able to sell advertising to companies seeking to reach those readers. But if AOL was trying to appeal to more of those readers, it would have long abandoned columnists with my perspective on things.

Instead, AOL -- based in New York City -- seems to reflect the aspirations of most content providers in that relatively left-leaning metropolis. In short, it aspires to appeal to the kinds of people who read The New Yorker, where a Ken Auletta profile of AOL's CEO Tim Armstrong, a former Google (GOOG) marketing executive, appeared in January. Acquiring HP goes further than any move so far to get AOL a share of the affluent, influential women readers that Armstrong hopes to attract in order to sell advertising to the companies aspiring to reach them.

In July 2006, I wrote a BloggingStocks post about AOL's then-new strategy of giving away $2 billion in subscription revenue with the goal of doubling advertising to make up the difference. I concluded that there was no compelling evidence that the strategy would work. And since 2006, AOL has lost 69% of its revenues from $7.8 billion in 2006 to $2.4 billion in 2010 while net income fell from $718 million to a $790 million loss during the period. 

Unfortunately, this financial decline has been caused by a loss in market position. According to the New York Times, AOL’s display advertising market share fell from 6.8% in 2009 to 5.3% in 2010, while revenue for display advertising plunged 14.3% and search revenue tumbled an even more severe 33.7% -- not what one might expect from a former Google executive.

With AOL's stock down over 3% in the wake of today's announcement, investors do not appear confident that the AOL/HP deal will reverse this trend.


Post a Comment

<< Home