AOHuffPo? HuffOL? What the new media mashup really means

February 7, 2011: 5:19 PM ET

AOL needed a traffic hub and social media know-how. HuffPo needed an exit and a new job for its visionary leader. Was merging the right answer?

As big as the Super Bowl's viewership was, the biggest news to come out of last night's festivities wasn't the Green Bay Packers' victory or even the bevy of new, pricey commercials that emerged, but the media bomb two attendees dropped right after the event. In a joint announcement, AOL CEO Tim Armstrong and Huffington Post founder Arianna Huffington announced he Internet giant would purchase the new media site for a cool $315 million, primarily cash payouts to HuffPo investors. Huffington will also become editor in chief of a new division, the Huffington Post Media Group, which will include all of AOL's (AOL) content sites, including recently acquired tech blog TechCrunch and existing stablemates Engadget, Patch, and Daily Finance, to name a few.

The news sent shock waves through the media industry and continues to do so. It's the latest in a string of acquisitions for AOL and in many ways, its most high-profile to date. Some pundits including opinionated tech blog TechCrunch, lauded the decision and welcomed what writer Paul Carr dubbed, "our new Huffington Overlord."  Others, like Dan Lyons of The Daily Beast, called the decision yet another fumble in AOL's "slow-motion train wreck" which will "end in disaster."

Yet there's no denying the site's inherent (and increasing) value. Launched in spring of 2005, HuffPo now draws more than 24 million unique visitors and 500 million page views a month. And though it has yet to reveal more detailed numbers, it's widely believed The Huffington Post turned a profit for the first time last year and generated $31 million in revenues -- not much when put alongside your Apples (AAPL) and Googles (GOOG) of the world, but certainly not shabby for a pure content play. For 2011, revenues were expected to exceed $50 million. Armstrong argues The Huffington Post will go a long way towards beefing up AOL's overall audience -- by as much as 22% to a total number of 117 million visitors or readers domestically and 220 million globally.

But as HuffPo's fortunes have risen, AOL's have fallen. In the last year, the company made $2.4 billion in revenues for 2010, a 25% drop compared to 2009 and a net loss of $782.5 million against net profit $248 million the year before. Meanwhile, its total share of online display advertising fell to 5.3% in 2010 from 6.8% in 2009. Many signs point to a struggling company trying to turn itself around, which Armstrong cautions won't happen until the second half of 2011 at earliest.

The property also presents a feature that other news outlets have only briefly skimmed the surface of: deep, site-wide social integration, the kind that other sites like The New York Times, The Wall Street Journal, et al. can currently only dream of.

Charlene Li, founder of the Altimeter Group, points to The Huffington Post's deep social sharing aspects as one of, if not the, most powerful examples of the social integration in a media site, from an easy-to-read basic toolbar displaying the number of times an article is "Liked," "Shared," Tweeted or emailed to other sharing alternatives at the bottom -- post to Blogger, Tumblr, WordPress, and TypePad -- and deeper, more proprietary features the site built from the ground up including commenter bios and virtual badges. Readers can become fans of commenters and writers, peruse their recent Tweets, as well as Tweets related to the article and the site in general alongside original content.

That's probably why many media and blog sites, including this one, can be chock full of comments from anonymous users with nondescript handles lobbing insults and profanities at one another for a post, but Huffington Post commenters tend to come across as more authentic and conversational.

"The Huffington Post was one of the first media sites to introduce social media to its readers with features that the company built in-house," Li says. "Those same features will only become more widely available if the new, rumored Facebook commenting system comes to pass." One of AOL's biggest issues is dealing with the declining traffic to its homepage as dial-up subscribers whose web browser homepages vestigially defaulted to AOL continue to bleed away from the company, costing it both revenues and traffic. With the powerful suite of social media tools HuffPo has developed, it's fair to say that Armstrong is placing a significant premium not just on buying traffic, but on buying the tech and know-how to grow traffic in-house.

Of course, great as all that sounds, the real question remains whether Huffington and her über-social brainchild will justify the $315 million price tag, which amounts to between 37.1% to 41.1% of AOL's available $801.8 million cash on hand as of December 2010. Miller Tabak + Co. analyst David C. Joyce predicts the site will grow 200% from 2011 to 2012, while other traditional media conglomerates will trail behind, growing between 10% and 12%. Given that, it's entirely possible HuffPo's rapid growth will help accelerate AOL's trajectory towards increased profit.

It's still rare for media mergers to work out well--something Fortune parent Time Warner (TWX)  knows, after its ill-fated marriage to AOL ended in 2009 with the companies failing to fully integrate or thrive as a single entity. The current iteration of AOL along with Huffington Post have far fewer moving parts, but no shortage of domineering personalities to wrench up the works.

Finally, the ostensible reason for the merger -- increasing page views against which to sell advertising -- is a business that has been called a "race to the bottom" by Gawker Media founder Nick Denton, meaning any traffic increases realized by the merger are likely going to be at least partially offset by a decline in the marginal revenue each new page view brings. In other words, no matter how much AOHuffPo increases traffic, revenue probably will probably grow only at an ever-declining fraction of the same rate. Unless Tim Armstrong and Arianna Huffington can find a way to buck the industry trend and increase the value of traffic, their version of AOL could end up being, rather than "1+1=11," a case of subtraction by addition.

Here's a list of some of the other notable acquisitions Armstrong has made since becoming CEO in April 2009:

June 11, 2009 – Patch: The hyper-local newspaper company creates newspaper sites throughout the U.S, each run by local editors and boosted by a number of freelance writers. Despite the fact it's losing some $30 million a quarter, Patch reportedly plans to up spending from $75 million a year to $160 million a year.

September 28, 2010 – TechCrunch: Corporate lawyer turned media mogul Mike Arrington started TechCrunch as a hobby back in 2005, but now it's one of the most popular tech blogs in Silicon Valley, which is probably why AOL reportedly paid up to $40 million for it.

December 16, 2010 – About.me: Never heard of it? There's a reason for that. The start-up, which creates profile pages that connect and pull content from users' social media profiles was purchased by AOL just four days after its launch.

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JP Mangalindan
JP Mangalindan
Writer, Fortune

JP Mangalindan is a San Francisco-based writer at Fortune, covering Silicon Valley. Since joining in 2010, he has written on a wide array of topics, from the turnaround of eBay to the evolution of net neutrality. A graduate of Fordham University, Mangalindan has also written for GQ, Popular Science, and Entertainment Weekly.

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