HuffPo/AOL: Content is King

AdWeek points out that while a lot of thought seems to have gone into the content side of the AOL/HuffPo merger--strategies for driving more traffic, delivering more video content, and so forth--the case for a merger on the business side seems considerably less compelling:

Based on documents leaked on the Web last week, AOL CEO Tim Armstrong is looking to push the company to evaluate each piece of content AOL produced on its readership potential and profitability.

"I think it's a really good deal for both parties," said Jordan Bitterman, svp of media at Digitas. "AOL wants to be in the content business, and this is an outstanding content play. And Huffington Post has this wonderful back end . . . It's really a new way of doing news. That technology product is probably worth a great deal on its own."

But no matter how good the content is, it still has to bring in revenue somehow. The question of how that will happen hasn't been answered yet. In fact, the purchase leaves AOL with even more unsold advertising space than it had without HuffPo.

AOL has long had plenty of scale yet has had trouble selling it. The company's ad revenue plummeted by 29 percent during the fourth quarter of 2010, landing at $331.6 million. Display dollars in the U.S. dropped by 8 percent. And even though HuffPo says it expects to pull in $60 million this year, double its 2010 revenue, the company has plenty of unsold ad avails.

"I don't think this solves that," said Adnetik CEO Ed Montes. "Now they have more unsold inventory."

Indeed, Montes wondered what AOL's sales strategy will be going forward. HuffPo has very publicly decried the use of ad networks to sell excess inventory as it attempted to define itself as a place for premium brands. Meanwhile, AOL has also sought premium advertising while managing one of the largest ad networks in the industry in Advertising.com.

The commodity side of the web ad business is a really terrible place to be unless you can generate content super-cheaply--as Google does, using mostly machine rather than human labor, or the way the content farms do, by scraping content from other sites and using it to build what are essentially spam networks. It's true that AOL and HuffPo's networks of free labor make them cheaper to produce than, say, nytimes.com. But AOL's troubles in this space show why this still may be a losing strategy. As more and more pages are added to the web, the space available for commodity web advertising is growing much faster than the demand for same. Unless the combined juggernaut can demand premium rates for its space--something that will not be achieved just by driving more traffic to their site--they're going to have trouble staying in the black.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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