The Honeymoon Is Over for AOL-Huffington Post

Four months after the $315 million acquisition, critics are scrutinizing the wisdom of the deal

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The honeymoon is over. Four months after AOL's $315 million acquisition of the Huffington Post, the wisdom of that purchase is coming under intensified scrutiny, as reports of dysfunction and stagnation trickle out about the media conglomerate. The first bit of negative news came from an unusual letter to Business Insider by a reader purportedly familiar with the company. The second comes from a densely sourced report by former AOL media reporter Jeff Bercovici, who now works at Forbes. Taken together, the reports show a flawed merger summoning the memory of AOL's previous marriage with Time Warner (aka, the worst corporate merger in U.S. history). Here are the troublesome signs:

Ad Sales Bercovici says the conglomerate isn't generating enough ad revenue to pay for Huffington's dream of the "great American newsroom." CEO Tim Armstrong came to AOL from Google, where he ran the search giant's incredibly successful U.S. ad sales division, with great hopes of boosting advertising revenues. "The problem, say insiders, is a sales organization that was already ineffectual when Armstrong arrived and has since become downright dysfunctional," writes Bercovici. "One of [Armstrong's] first moves upon arrival was to push out Coleman–the same Greg Coleman who then went to HuffPo–and replace him with Jeff Levick, another Google veteran, who brought in his own team. Levick, whose background is in search advertising, has had trouble making inroads into the more lucrative but elusive world of display advertising that AOL needs to survive." The company has only recently managed to increase its display ad revenues, which increased by only 4 percent in the first quarter. “It’s a start,” a former AOL executive tells Bercovici. “The question is, can you drive that thing much higher? I don’t think they can with the advertising team they have now.”

Problems with Arianna "The editorial team is miserable and views Arianna as unpredictable and her leadership unsteady," read the Business Insider letter. "Several editors are racing to close book deals to write the 'Devil Wear’s Prada' of the digital age.  Others are aggressively pitching unflattering profiles to New York Magazine, Vanity Fair, and the LA Times." Bercovici's report also portrays Huffington in an unflattering light. “I know Arianna very well,” says Greg Coleman, former Huffington Post chief revenue officer. “She wanted three things: a big bag of gold, a big fat contract, which she deserved, and … unilateral decision making over her world. And that is where you’re going to have some problems. Arianna hates to be managed.”

Problems with Armstrong By a number of accounts, the CEO's leadership style appears somewhat fickle. "Former AOL executives have accused Armstrong of lurching from one infatuation to another," reports Bercovici. A former member of Armstrong's executive team says “You make a case and he listens to the facts to make a determination. Then somebody else speaks and 20 minutes later he changes his mind.” A number of drastic changes have occurred at the company in just the last couple years: it had a focus on niche blogs, then tried to bring its similar blogs into "Towns," a widely-panned document called "The AOL Way" surfaced with rigid page view targets and was later dropped alongside its author, Armstrong's former Google colleague David Eun. The Business Insider letter accuses him of favoritism. "CEO Tim Armstrong remains enamored with the Huffpost team and has created a double standard," it reads. "huffposters can launch poor sites, create low quality articles, and launch low quality video programming and get away with it. He believes they can do no wrong and that the integration is going fantastic."

General infighting AOL has an empire of blogs and it's not always easy to keep them in harmony. This site has chronicled a number of intra-company spats at AOL, including TechCrunch editor Michael Arrington's badmouthing of tech site Engadget, which ended up losing its editor-in-chief. And then of course TechCrunch's calls for the resignation of Moviefone's editor Patricia Chui, who was later fired by Huffington. The Business Insider letter points to even more problems with editors' management skills. "None of AOL’s senior editors (Huffington, Roy Sekoff, and Nico Pitney) have ever managed more than a few people," it read. "Now they have hundreds and lack the experience to manage a team this big.  Behind the scenes, long time Huffposters say that Jai Singh’s departure has eliminated the key adult in the room.  Now they need to grow HuffPost and save AOL – not possible."

Bottom line  Bercovici foreshadows a situation where Huffington walks out and AOL is stuck in a familiar situation. "AOL could face a future where display-ad revenues grow, but not as quickly as subscription revenues shrink," he writes. "As 2013 approaches, Armstrong could be forced to choose between keeping his promises to Wall Street or making good on his pledge to Huffington to create the next great American newsroom. If shareholders win, putting a crimp in her costly dream, Arianna will probably walk–and Armstrong will be back where he was six months ago."

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