In agreeing to buy The Huffington Post for $315 million, AOL is putting what appears to be a significant premium on the ability to attract and build a community of readers.
AP
Arianna Huffington
Yet as more and more advertising dollars flow to the Web and to mobile devices, demand for popular and prolific online content producers like The Huffington Post, is rising.
The market for online advertising is expected to increase 14 percent, to $51.9 billion, this year, according to the research firm Borrell Associates.
With that kind of growth, the deal for The Huffington Post is expected to raise the bar for other independent online media companies whose audiences have surged with the help of social media platforms like Twitter and Facebook.
Speculation is now turning to what prices others could fetch should they ever go on the block.
Among the biggest is Gawker Media, home to a collection of popular sites, such as its flagship property and technology blog, Gizmodo, which attracts about 19 million users a month, according to comScore.
Glam Media, a group of beauty and fashion sites geared toward women, boasts 87.8 million visitors a month.
The three-year-old Business Insider, something akin to a business version of The Huffington Post, with its mix of breaking original content and aggregation, attracts 3.5 million visitors a month, comScore says.
And companies like AOL and Yahoo have been on the prowl for content providers.
“Right now, the macroeconomic turnaround and the explosive growth in mobile, is causing Internet companies to accelerate their investments and there’s a question of what is content,” said Ben Schachter, an analyst with Macquarie Securities.
“Companies like AOL and Yahoo are in a battle to make themselves relevant.”
For that reason, analysts barely blinked at a valuation for The Huffington Post that by most measures was a lofty one. The price is 6.3 times The Huffington Post’s projected revenue of more than $50 million for this year.
That’s more expensive than the $25 million AOL paid last September to acquire TechCrunch, which claims to generate about $10 million in annual revenues.
If one uses AOL’s projections for revenue growth and costs savings in 2012, the price for The Huffington Post comes to 10 times earnings before interest, taxes, depreciation and amortization or Ebitda, wrote Mark S. Mahaney, an analyst with Citigroup.
“Not cheap, but not outrageous for a relatively high quality asset with strong top-line growth, current profitability and margin expansion potential,” he wrote.
Another analyst, Clayton Moran of the Benchmark Company, was more cautious, saying such a measure was “somewhat speculative.”
Other companies are also paying healthy premiums for content providers. Last May, Yahoo paid $90 million for Associated Content, a site that creates low-cost, crowd-sourced content and boasts 16 million visitors a month.
In 2008, CBS paid $1.8 billion for CNET News, roughly four times revenues for that year. At the time, CNET was attracting some 161 million visitors per month.
For its part, The Huffington Post has had strong growth, with the number of its unique visitors rising to 25 million, up 22 percent from a year ago.
And part of the reason AOL is willing to pay a high premium for the company is Arianna Huffington herself, who will now preside over AOL’s editorial content.
The Huffington Post, which is profitable, has an army of thousands of contributors, most of whom are not paid; it also features dozens of big names like Alec Baldwin.
The platform promotes its content through its highly engaged community: social media buttons are prominently displayed on in posts, comments often number in the hundreds, and the site’s most active users are rewarded with badges.
“I think Tim Armstrong understands how important Huffington Post is to the social media landscape,” said Lou Kerner, an analyst with Wedbush Securities.
“Huffington Post is a pretty unique business in terms of scale and growth and the degree to which it gets social media and the way it deeply integrates it into the site.”
Over the last two years, AOL has been building out its stable of content-centric companies, spending more than half a billion to buy start-ups like TechCrunch, a technology media company, and Patch, a local news service.
AOL has tried to build out its own content companies, such as Daily Finance and Politics Daily, but those sites have attracted a fraction of the audience size of The Huffington Post. Those sites will likely be folded into The Huffington Post.
Mr. Kerner contends that The Huffington Post is worth well more than $315 million, especially when combined with AOL’s sales force.
Still, AOL’s track record on acquisitions has featured some notable missteps, like its $850 million purchase of Bebo.
“People should bow at the greatness of the Huffington Post for being able to gauge their audience; it’s worth a lot, but then again, AOL could screw it all up,” he said.