The AOL Way: Broken, battered and hopeless

February 2, 2011: 2:36 PM ET

A leaked presentation on its "master plan" and its abysmal earnings report only confirm that AOL needs a new way.

By Dan Mitchell, contributor

Tim Armstrong

AOL chief Tim Armstrong

Ken Auletta's profile in The New Yorker of AOL CEO Tim Armstrong last month was a grim assessment the company's prospects and a scathing indictment of the quality of AOL's content -- much of which, Auletta wrote, is "piffle." The company, he seemed to conclude, is more likely than not to "crash." AOL's earnings report released Wednesday morning didn't do much to belie that conclusion.

On Tuesday, the Web site Business Insider published a leaked copy of the company's "master plan" to turn things around. Called "The AOL Way," the 58-slide presentation supports both of Auletta's claims: that the company seems to care far more about appealing to search engines than it cares about appealing to readers, and that it is desperate. So desperate that it's instructing editorial managers to increase traffic by eye-popping amounts in a very short period of time.

The plan calls AOL's blog posts, stories and videos "pieces of content." It currently publishes 31,500 pieces a month. By April, the company must be publishing 40,000 a month, according to the plan -- an increase of 27% in two months. What is reportedly upsetting staffers even more is the demand that average number of pageviews per post rise from 1,512 now to 7,000 by April, an increase of 362%. Writers must create between 5 and 10 items per day. One anonymous editorial staffer used foul language to tell Business Insider what he thought of the company and he called his taking the job "the worst career move I've ever made."

"The AOL Way" sounds a lot like "The Bloomberg Way" – the set of heuristics the business-news service has operated from for years. But the similarities stop with the title. While Bloomberg has a reputation for its highly disciplined and demanding (some would say despotic) approach, "The Bloomberg Way" is mainly aimed at producing high-quality business journalism. "The AOL Way" is mainly about ramping up volume and, largely through technological manipulation, squeezing out as much profit as possible from each "piece of content," regardless of its quality.

Murky business model

Besides a few key numbers, it's difficult for an outsider (and presumably many insiders) to decipher much of what's in the presentation. It's riddled with buzzwords, euphemisms, and intricate, complex graphics. The importance of AOL's (AOL) content is mentioned here and there, but only in an offhand fashion, almost as an afterthought. Much attention is given to search-engine optimization. Almost none is given to editorial quality.

The earnings report tells the underlying tale of AOL's problem: its main source of revenue – sales of its dialup Internet service – are plummeting. Those fees still account for 80% of the company's profits. A former executive told Auletta last month that AOL's "dirty little secret" is that three-quarters of dialup subscribers don't realize that they don't even need the $25 monthly service because they already have cable or DSL service. Many of them are elderly.

For now, those people are subsidizing AOL's media business. Ad rates are plummeting. Local news, on which AOL is betting heavily through its Patch network, is particularly difficult to make money from.

"We've come a long way very quickly and our journey is just beginning," Armstrong said Wednesday on a conference call with investors. And "2011 is the year we stop working on the turnaround and start working on the comeback." But there isn't much in AOL's fourth-quarter numbers that could be taken as hopeful. Ad revenues fell by 29%. Subscription revenue dropped by 23%. Total sales were off by 26%. Thanks to cost-cutting and asset sales, profits were up in the fourth quarter, to $66.2 million. For the year, though, AOL posted a loss of $782 million.

Farming it out

The "master plan" is meant to make up for the shortcomings in ad sales. The plan spreads the ideas behind AOL's Seed system throughout the company's media businesses. Seed, much like the "content farm" Demand Media (DMD), depends on algorithms that assign stories based on what people are searching for, which results in those stories appearing higher in search results. Ad rates might be low, but content-farming helps derive profits from sheer volume, at least in the short term. The quality of the content is at best a tertiary consideration.

Given Demand Media's recent, successful stock-market debut, you almost can't blame AOL for adopting a similar strategy. But for both companies, the benefits of gaming search engines might be short-lived. At any time, Google (GOOG) and other search engines could change their algorithms, sending the products of content farms way down in results. And even if that doesn't happen, potential readers could eventually catch on, ignoring content they have learned is often inferior.

The quality of content is a partly subjective assessment, of course. But here's a sampling of the stories Seed is currently offering to freelancers: "Parents at Justin Bieber Concerts (photos)," "Confessions of a Greeting Card Writer," and "Why I Love to Dress My Body." That last one, which would be published on AOL's StyleList site, pays $50. Meanwhile, "Backpacking the Axis of Evil," due in five days, pays $10 for 1,000 words. Most assignments range between $10 and $25.

A head-to-head valuation comparison of Demand and AOL at this point would be misguided, though. Other than Seed, AOL isn't much like Demand, at least not yet. AOL is not only switching from one business to another, but is spending big on content creation and a nationwide local strategy, as well as actual newsgathering operations. Demand, meanwhile, is an organic content farmer, if you will, paying tiny amounts to an army of freelancers who churn out how-to articles. AOL's master plan, however, suggests that all of its content -- including the higher quality journalism from sites like Techcrunch, Daily Finance, and Politics Daily -- is increasingly heading in Demand's direction.

The desperate grasping for pageviews revealed by the master plan is "a game of constantly diminishing returns," notes GigaOm's Matthew Ingram. It "drives down the advertising rates that companies like AOL and Demand are basing their future livelihoods on. It's like the Red Queen's race in Alice in Wonderland: you have to run twice as fast just to stay in the same place."

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