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That Remake of AOL? It’s Still Being Written

SAN FRANCISCO — AOL hit a hard bump on its road to becoming a digital media company.

Last week it reported another loss and told Wall Street analysts it was not going to get much better: operating income for the year could be down as much as 20 percent because of weaker ad sales. The performance raised new doubts about whether AOL’s big bet on editorial content, including the acquisition of The Huffington Post news site, co-founded by Arianna Huffington, would reverse a decade-long decline.

The AOL corporate headquarters on Broadway in New York City.
Mario Tama | Getty Images North America | Getty Images
The AOL corporate headquarters on Broadway in New York City.

The investor response to these disappointments was emphatic. The company’s shares lost a third of their value over two days.

“Frankly, AOL hasn’t delivered on its promise yet,” said Sameet Sinha, an analyst with B. Riley & Company. “It’s just been a series of stumbles.”

Tim Armstrong, AOL’s chief executive, is confident that his company can regain some of its former glory. Despite the recent setback, he says he remains committed to rebuilding AOL and using The Huffington Post as the foundation.

“We believe that The Huffington Post acquisition is one of the best things we’ve done,” Mr. Armstrong said in an interview.

Mr. Armstrong, 40, is trying to remake AOL into a media powerhouse to offset the lost revenue from a steadily dwindling Internet access business. It’s a big site. More than 105 million unique visitors dropped in during July to use e-mail, catch up on celebrity gossip and check the weather. The strategy is just the latest formulated by a string of leaders at AOL, which merged with Time Warner during the Internet boom and then almost immediately started to struggle.

Mr. Armstrong, a former top ad executive at Google, joined AOL two years ago just before it regained its independence.

Fixing the company will take until 2013, he acknowledged. Meanwhile, he said he was spending up to $250 million of the $459 million the company had on hand to buy back its devalued stock. The gesture helped the shares regain some of their losses for the week. He has been spending heavily in the core products too. Since buying The Huffington Post in March for $315 million, Mr. Armstrong has added 17 new sections, like divorce, parenting and Latino issues. AOL is introducing international editions for Canada and Britain.

"I'm not going anywhere...I'm having a great time." -Editor in Chief, HuffingtonPost Media Group, Ariana Huffington

AOL also added 300 journalists to The Huffington Post as it shifted from its roots in aggregating coverage from others to writing more original news.

As leader of AOL’s content operations, Ms. Huffington is a crucial player at the company and the face of its content arm. She oversees established AOL sites like Stylelist, Moviefone and MapQuest along with more recent additions like the technology blog TechCrunch, acquired six months before The Huffington Post deal, for $25 million.

Ms. Huffington, 61, cited a number of journalistic high points since joining AOL, including a scoop that Gov. Chris Christie of New Jersey used a state helicopter to attend his son’s baseball game and a series on college students prostituting themselves to pay for tuition.

In terms of low points, The Huffington Post briefly suspended a writer last month who “over-aggregated” an article from Advertising Age by summarizing its contents too thoroughly. It underscored a frequent complaint that The Huffington Post steals traffic from publishers by rewriting articles to the point that it is unnecessary for readers to click on a link to the original source.

AOL lost $11.8 million in the second quarter compared with $1.06 billion during the same period a year ago, on $542 million in revenue compared with $584 million a year ago. Global advertising revenue grew 5 percent, the first gain by the company in overall advertising since it split from Time Warner.

Tim Armstrong and Arianna Huffington
Tim Armstrong and Arianna Huffington

Still, AOL executives conceded that they could have done a better job with search and domestic display ads. AOL’s display ad gains of 14 percent in the quarter were less than the 24.5 percent expected growth for the overall industry this year, according to eMarketer.

Last month, Mr. Armstrong also replaced his top ad executive.

AOL’s decline in value is so great that analysts point out that the company may be worth more now broken into pieces and sold. The Internet access business, in particular, would be good to unload, they say.

Other ideas include closing Patch, AOL’s local news initiative that has reporters in 850 towns. Eliminating the money-losing service would free $160 million and lift AOL into profitability.

Mr. Armstrong responded to such suggestions by saying that the long-term benefits of his strategy outweighed any short-term gains promoted by Wall Street analysts. High-quality content, he said, is the Internet’s future growth engine.

Meanwhile, AOL struggles to attract more visitors because of an eroding base of dial-up subscribers. The number of subscribers fell 21 percent in the last quarter to 3.4 million, for example.

Maintaining existing traffic numbers to its sites should therefore be considered a victory, Mr. Armstrong said. In July, all of AOL’s sites attracted 105 million unique visitors, 2 percent fewer than in the same month last year, according to comScore.

In contrast to the overall flat growth, traffic in The Huffington Post sites has grown around 12 percent since it was acquired, to nearly 35 million. But some of that gain is from shifting traffic from established AOL sites that were closed.

Ms. Huffington, who has a multiyear contract, said that she was as encouraged as ever by AOL, and that there remained more work ahead to integrate The Huffington Post with the rest of the company’s sites.

“I’m not going anywhere,” Ms. Huffington said. “I’m having a great time.”

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