AOL’s Bet on Another Makeover

SAN FRANCISCO — AOL is trying to remake itself, yet again.  The new strategy in many ways resembles the old strategy: make acquisitions to attract traffic and reverse a continuing decline in advertising and revenue from its dial-up Internet service. In the latest iteration of its do-over, it is paying $315 million to buy the liberal news commentary site The Huffington Post, not long after paying $25 million to buy TechCrunch, the Silicon Valley technology news blog.

But skepticism runs deep that this effort will be any more successful than the many other makeovers it has tried in the last decade.

“My gut says that the clock has run out for AOL, but I’m happy to see someone make a bold bet,” said Salim Ismail, a former Yahoo executive. “Doing nothing is worse.” AOL has its doubters among investors. Its shares fell 75 cents, or 3.42 percent, to close at $21.19 on Monday.

Even some AOL insiders poked fun at The Huffington Post deal. Michael Arrington, the voluble founder of TechCrunch, who frequently ridicules AOL’s bureaucracy even though he now works for the company, did so again on Monday. “I want to know right now,” he wrote in a post on Twitter to Arianna Huffington, the site’s founder, on Monday morning, “whether or not you had to sit thru the four-hour orientation meeting.” Several hours earlier, he wrote that he liked her, “despite her insane politics.”

AOL is making a big bet on Ms. Huffington. She has been given the task by AOL’s chief executive, Timothy M. Armstrong, of stitching together the company’s disparate content sites into a cohesive news factory for the digital age. But turning that vision into reality will be a challenge, given that AOL is beset by a decade-long decline in its core legacy business of dial-up Internet service as well as declining revenue from online advertising.

Indeed, despite traffic of 112 million visitors a month, AOL’s online advertising fell 26 percent last year, to $1.28 billion, while advertising for the rest of the industry rose 17 percent, according to eMarketer. Revenue from its dial-up subscribers also declined 26 percent, to $1.02 billion.

Finding a way to replace revenue from AOL’s declining dial-up business is an imperative for Mr. Armstrong, who took over as chief executive in 2009.

The company has gone through multiple overhauls over the years, but none of them have worked. It bought a collection of blogs, including Engadget and Joystiq, in 2005. It bought an advertising network, Tacoda, for $275 million in 2007. It lurched yet another direction when it bought Bebo, a social networking site in 2008, but sold that last year for a fraction of the $850 million it paid. It also made its subscription e-mail service free, like Google’s or Yahoo’s, yet it lost users.

Mr. Armstrong is now focusing his turnaround effort on editorial content, one of AOL’s traditional strengths.

Mr. Armstrong’s vision resembles that of another chief executive struggling to resurrect a legacy Internet company, Carol A. Bartz of Yahoo.

Internet users would come get a variety of news from one source. In AOL’s case it would be local news from Patch, technology start-up news at TechCrunch and cultural and political news from The Huffington Post. AOL also would provide information from its Mapquest and Moviefone services.

But AOL has yet to show signs of progress with this model, though AOL executives have said that its display advertising business will pick up in the second half of 2011.

“This huge transition that Tim Armstrong is trying to pull off hasn’t worked yet,” said Ken Doctor, a news industry analyst with Outsell and author of the book “Newsonomics.” Mr. Doctor said, “They have all these assets that aren’t recognizable as a single company.”

AOL finds itself in the rare position of selling less online advertising, while all around it major media companies are selling more. AOL’s problem is that it is still dependent on subscribers, those people who pay a minimum of $10 a month for dial-up service, to support its advertising business. AOL’s paying subscribers peaked at 26.7 million subscribers in 2003, but has now dropped to 3.85 million. That’s 86 percent fewer people looking at ads on AOL.

Mr. Armstrong is counting on The Huffington Post to lift online advertising by lifting traffic and page views. Eventually, AOL hopes to rebuild on this new foundation.

How does Ms. Huffington change that? Huffington Post is a master of finding stories across the Web, stripping them to their essence and placing well-created headlines on them that rise to the top of search engine results, guaranteeing a strong audience. For instance, on Sunday it posted an article that was pure search engine bait, “What Time Does the Super Bowl Start?”

Mr. Armstrong said that he hoped to accelerate The Huffington Post’s growth by tying it in with AOL’s other properties, and in turn lift traffic to those other properties. Expanding The Huffington Post internationally and creating a video version of The Huffington Post are among the planned projects.

Mr. Armstrong said that this time AOL’s remodeling would be different. Unlike the previous failed strategies by his predecessors at AOL, he said in an interview Monday, “We’re betting on something that’s a known quantity and something that’s going to happen.”

Buying The Huffington Post is “doubling down” on that strategy, he said.

He said, for instance, that The Huffington Post created a second front door for users into AOL’s content and gave AOL the ability to cut content in different ways and target advertising.

“Huffington Post is a scaled version of what we’ve been doing.”

AOL can help to improve The Huffington Post, which he says, commands low rates from advertisers. Paring with AOL will lift The Huffington Post’s traffic. AOL increased TechCrunch’s traffic by 30 percent since its acquisition, he said.

Mr. Armstrong acknowledged the skepticism about AOL given its past failed turnaround efforts. But he said that growth in online advertising would ultimately offset the loss in dial-up subscribers sometime in 2013.

“We are essentially two years away from a growth business on the Internet.”

AOL will pay for The Huffington Post out of nearly $802 million in cash on hand at the end of 2010. The remainder provides a cushion for expansion.

“They need to buy their way out of the access business, and this is a pretty big step in that direction,” said Youssef H. Squali, an analyst with Jefferies & Company.