AOL chief Tim Armstrong says he wants the company, with guidance from Arianna… (Jin Lee, Bloomberg )
It used to be "You've got mail." Now it's becoming "You've got news."
With the $315-million purchase of the Huffington Post, a 5-year-old news and politics website run by political pundit Arianna Huffington, AOL Inc. is making its biggest bet yet that it can reinvent itself as a must-read source for online news, gossip and opinion.
AOL, the Internet company that helped popularize e-mail, has seen its once-massive dial-up business dwindle to nearly one-tenth the number of subscribers it had in its heyday.
Hoping to reverse its fortunes, AOL Chief Executive Tim Armstrong has given AOL a new home page and has acquired a series of news websites and other online businesses in the last year, with the Huffington Post the largest so far.
Some investors and analysts were skeptical that the latest deal could help AOL pull off a turnaround. On Monday, AOL shares fell more than 3.4% to $21.19. The stock has slid nearly 14% in the last three months.
Critics of the deal said AOL was taking a risky gamble by agreeing to a price that was more than 30 times the Huffington Post's annual operating cash flow of $10 million. Typically buyers pay 10 to 15 times the cash flow, said Clayton Moran, an analyst at Benchmark Co.
"It's definitely a high valuation," Moran said.
AOL said it expected the Huffington Post's cash flow to be closer to $30 million by 2012 — a figure that would put the sale price more in line with industry norms. But, Moran said, "there's a lot of risk because a lot can change between now and 2012."
Armstrong, who was formerly in charge of the U.S. ad business for Google Inc., is hoping AOL's extensive advertising sales force can help the Huffington Post attract more ad dollars.
"It's a big advertising play," said Ken Doctor, the author of "Newsonomics," a book about the future of the online news business. "Armstrong has been betting he can be a leader in efficiently monetizing all kinds of content."
The Huffington Post is the latest addition to AOL's portfolio of dozens of websites, including the recently acquired technology news blog TechCrunch, the tech blog Engadget, the Moviefone movie listing site and the local news effort Patch. AOL is also affiliated with the gossip site TMZ.
But the Huffington Post has long been listed as one of the most-trafficked websites, with more than 24 million monthly visitors in the U.S. — about 22% of the traffic of all of AOL's current properties combined.
"The Huffington Post is one of the best properties on the Internet," Armstrong said Monday in a conference call with investors, adding that the acquisition would help AOL compete with a crowded field of Internet start-ups and traditional media vying for users' attention.
Unlike News Corp., which recently launched a fee-based online newspaper for the iPad tablet, AOL is offering the content free of charge. That may be a strategic approach at a time when many newspapers and magazines are beginning to erect pay walls around their news, especially when it comes to the millions of touch-screen tablet computers that have been sold in recent months.
Armstrong said he wants AOL, with Huffington's guidance, to focus on local news and content geared toward women, both of which he sees as untapped markets online. They represent demographics that advertisers are willing to pay a premium to reach, he said.
Over the next few years, Armstrong believes, major advertisers will be focusing their online campaigns on a small number of prominent Web destinations such as AOL, instead of spreading their ads across thousands of lesser-known sites.
Huffington, who will be AOL's editor in chief for news content, said she had worked to create a lively but civil forum for political and cultural discussion, a recipe she thought would translate to AOL's other news sites.
"[Craigslist founder] Craig Newmark said it best when he said, 'Trust is the new black,'" she said. "Our reverence for facts and the traditional values of journalism — fairness, accuracy — is going to continue to make the new site a place where people can really trust to get their information."
But Alan D. Mutter, a new-media consultant who used to work as an editor at the San Francisco Chronicle, saw the acquisition as a bit of clever misdirection.
AOL's last major initiative, the locally tailored news site Patch, hasn't caught on among Web readers or advertisers as AOL hoped it would, Mutter said.
"That was their big story," he said. "Now they need a new story to make it look as though they have a plan."