The Other McCain

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Patch: AOL’s Expensive Failure

Posted on | December 16, 2013 | 27 Comments

Do you remember in February 2011 when AOL bought the Huffington Post for $315 million? Did that price tag come to mind in August when Amazon’s Jeff Bezos bought the Washington Post for $250 million?

Do these numbers even make sense?

Huffington Post = $315 million
Washington Post = $250 million

Excuse me for suspecting that the brand Bezos bought was far more valuable than the brand AOL’s Tim Armstrong bought, and excuse me also for thinking Armstrong is one of the most clueless executives in online media.

AOL’s Tim Armstrong reluctantly lets go
of Patch as shareholder pressures mount

Maybe you don’t care about this little media industry story, but it’s fascinating how the failure happened, and how Armstrong was permitted to throw away money on this pet project:

Mr. Armstrong had a sentimental, and some would say debilitating, attachment to Patch. He helped create it in 2007 while a senior executive at Google. When he got the top job at AOL in 2009, he persuaded the company to buy it. Patch then proceeded to churn through leadership, business models and write-downs on the way to its reduced state.
The board of AOL, handpicked by Mr. Armstrong, authorized him to invest $50 million on the idea in 2010 and after that, it became a black hole for cash. By the end, it had cost an estimated $300 million. (AOL said the figure was more like $200 million.)

Well, $200 million, $300 million, what’s the difference? Either way, it was a lot of cash: At least $50 million a year for four years. And for a dollar amount similar to what Tim Armstrong pissed away on this experimental network of hyper-local news sites, he could have bought the Washington Post, but Patch was Armstrong’s beloved brainchild:

Mr. Armstrong is nothing if not a true believer. Even though Patch is being dismantled or perhaps sold off to various partners, he still believes that he had the right product in the right space, and that he just ran out of runway.
That runway ended because of a schedule he set. In May 2012, he promised restive investors on an earnings call that he would make Patch profitable by the end of 2013. That page of the calendar arrives this month while profitability remains on a far shore, so Mr. Armstrong is reluctantly throwing in the towel.
The theory was that Patch would use a single news person and a single advertising person, at least initially, to create a digital maypole in hundreds of communities at a cost of about $100,000 annually per site. . . .
The execution risk was large — Patch was all moving parts, many undermanaged. At its peak, some 900 sites employed 1,400 people.

This is from a 2011 interview with Armstrong:

Patch was something I started on a personal level that I funded and co-founded with another person who’s at AOL with me now, Jon Brod. Basically, Patch was formed because in my community [of Riverside, Conn.], we had a real lack in information. As the economy got worse, there was less and less journalism in my town and there was a lot of missing information online. So Patch started as a personal project to see if I could help solve the issues in my town. As we got going and realized it was broader and broader, we decided to ramp up and do a much bigger project. I think Patch is in about 800 communities across the U.S. It will go up to 1,000 communities this year. We’ve hired about 1,000 journalists. I brought Patch into AOL when I came to AOL.

So, what began as “a personal project to see if I could help solve the issues in my town” turned into a sucking chest wound that bled AOL’s bottom line to the tune of at least $200 million. By the way, Armstrong’s Patch co-founder recently left AOL:

Brod is one of the last AOL executives with longstanding ties to Armstrong. He was one of Patch’s co-founders, and joined AOL after Armstrong, an early Patch investor, bought the company in June 2009.
After that, he held a variety of roles: He first ran AOL Ventures, and at one point was in charge of “integrating” Arianna Huffington and her operation after AOL bought her company. Armstrong moved him back to Patch in 2011.

Also last week, it was reported that AOL editor in chief Cyndi Stivers, who was only hired in May, is leaving the company.

Rats, sinking ship, some assembly required.

At some point, AOL’s stockholders will either wise up and get a new CEO, or else they’ll sell off, but however it shakes out, Tim Armstrong will not be allowed to continue failing this way.

 

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Comments

  • Jeanette Victoria

    Gosh can I have 50 m for a personal project?

  • Pablo

    Abel Lenz should be glad he’s cleared the blast radius.

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  • robertstacymccain

    I know, right? Try to think about it this way: You could either (a) plow $50 million a year into your CEO’s pet project, or (b) fund 200 different independent projects at $250,000 a year.

    Which approach do you think would ultimately be more likely to produce success?

    But before we laugh too hard at Armstrong’s Folly, consider how GOP donors did something quite similar: In the 2012 election cycle, Karl Rove’s American Crossroads/Crossroads GPS burned through more than $100 million, and for what? With $100 million, you could have funded 20 separate operations for $5 million each, but the “brand name” appeal of Karl Rove was like a magnet for dumb GOP dollars, and every time Rove appeared on Fox News, it was like free advertising for Crossroad. If Republicans had actually won, nobody could complain, but instead Republicans lost, and so the question is: When will GOP donors wise up and get over their all-eggs-in-one-basket approach?

  • http://evilbloggerlady.blogspot.com/ Evi L. Bloggerlady

    Sounds like he is ready for government work!

  • http://evilbloggerlady.blogspot.com/ Evi L. Bloggerlady

    Don’t you just want to give your money to Karl Rove?

  • G Joubert

    In a sane and rational world AOL would’ve dried up and been blown away by the wind 10 or more years ago, when consumers moved beyond dial-up internet connections. I suppose Time-Warner gets the credit for puffing up a flawed business model and infusing it with cash to waste.

  • Wombat_socho

    No.

  • http://opinion.ak4mc.us/ McGehee

    In other news, AOL still exists.

  • http://www.journal14.com/ Dana

    The bad thing about it is that I’m kind of stuck with AOL. I signed on in 1994, and AOL’s policy of allowing family e-mail accounts has enabled me to put two (poor) family members from rather far away on my account, no charge to me and thus free service for them. If I dump AOL, they have to start paying for their own stuff. :(

  • Kirby McCain

    Let me guess, you have an Iphone?

  • Kirby McCain

    And Nick Saban is still THE coach at Alabama.

  • Kirby McCain

    If I had 50 million for a personal project it would involve insane strippers. I know what you’re thinking, but wouldn’t America be better off if they were all in one place where I could keep an eye on them?

  • Kirby McCain

    Great piece Ali but isn’t it strange how CEOs are only evil when they make money? Or their corporation is somehow affiliated with a conservative.

  • Tom Servo

    I must say that I think you are wrong about the value of Patch; in Armstrong’s defense, I think it really was worth more than the Washington Post.

    And I say that with full knowledge of what Patch is worth right now.

  • texlovera

    I FIRST heard of “Patch” just a few months ago or so, when they announced a bunch of layoffs. That right there is pretty indicative of their “problem”.

    Also of note is that they had NO sites in the entire State of Texas.

  • Wombat_socho

    The sad thing is that they actually had some good stuff in there – which they’ve wasted no time in croaking instead of spinning it off. Winamp comes to mind.

  • MattRoss

    Lol, this is the first I’ve heard of “Patch.” I was an AOL customer for a short time, about 10 years ago. My antivirus software kept identifying AOL as a virus. I never looked back.

  • Quartermaster

    Still butt hurt over the cataclysm?

  • Quartermaster

    H8er!

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  • Wombat_socho

    My hate keeps me warm at night. Who are you to judge?
    (HHO10%K)