by EMILY STEEL And RUSSELL ADAMS
February 8, 2011
AOL Inc.'s acquisition of the Huffington Post is the latest step in its uphill quest to eke profits from free content on the Internet and to make the company relevant to users and advertisers again.
AOL is paying $315 million to buy the nearly six-year-old Huffington Post, a rich price to hitch itself to a news and opinion website and its outspoken celebrity co-founder and editor-in-chief, Arianna Huffington. While the site was launched as a counterweight to conservative sites like the Drudge Report, in recent years it has expanded into topics like sports, entertainment, sex and self-help.
The deal installs the 60-year-old Ms. Huffington as president and editor-in-chief of a new group inside AOL, overseeing the roughly 700 editorial employees across both the Huffington Post and AOL, including AOL's tech blogs Engadget and TechCrunch.
A columnist turned talk-show staple who has become an influential voice for the political left, Ms. Huffington signed a multi-year contract with AOL. She said she wants to apply the Huffington Post model—a combination of aggregated content and original reporting—to AOL.
She plans to move to New York and deploy a similar editorial management structure that she has pursued at the Huffington Post: selecting editors from established publications and pairing them with newly minted reporters and freelancers.
The site has taken heat from traditional news companies for aggregating other publications' content without paying for it.
Ms. Huffington has said news aggregation is "part of the Web's DNA."
And Huffington Post spokesman Mario Ruiz said, "The majority of our content is original, including our vast number of blog posts." The company has 148 editorial staffers.
Addressing the site's liberal political stance, AOL's chief executive, Tim Armstrong, said AOL will "build more and more properties that are beyond left and right and tackle larger issues in society that are not political based."
Some investors are dubious that AOL has the advertising prowess to make money off the content it is distributing and Wall Street had some doubts about the deal and the price. AOL stock fell 75 cents, or 3.4%, to $21.19 in Monday trading on the New York Stock Exchange.
Analysts said that the major risks are the integration and political controversy. "Arianna Huffington's political views could challenge AOL's perception as an unbiased source of news, potentially impacting traffic growth," UBS analyst Brian Pitz said.
"We think this is an aggressive move, but complicates the story." Ben Schachter, an Internet analyst with Macquarie Securities, said in an analyst note. "AOL remains a company in transition. In many ways, it is a binary equation: either its content business becomes profitable or it doesn't."
One person close to the situation said people in AOL's sales department are excited to have a fresh, high-profile, buzzy ad space to sell.
The cost to buy an ad on AOL's home page— the most expensive ad slot —is about $200,000 per day, and the cost to buy an ad on Huffington Post's home page ranges from $90,000 to $125,000, according to an ad buyer. AOL generally is the cheapest of the three major portals, MSN and Yahoo, the buyer said. These rates are estimates and depend on several factors, including the size of the total ad buy and time of year. Ad rates on other sections range widely.
The deal underscores how companies like AOL and Yahoo Inc. are racing to develop inexpensive content to bundle for advertisers and to keep consumers' on their sites longer.
Since becoming chief executive of AOL in 2009, Mr. Armstrong has been on the hunt for content companies, purchasing TechCrunch and online video company 5min Inc. in September, among others. Still, AOL's ad revenue fell 29% in the fourth quarter even as the broader industry enjoyed growth.
AOL is seeking to produce more content cheaply and it has struck partnerships with celebrities and producers to create more original video content. Last week, AOL said it was teaming up with reality-show producer Mark Burnett and an independent movie company to make comedic videos based on CliffsNotes, which students often read for quick summaries of school books.
AOL says that its content strategy will start to pay off in the second half of this year.
For the Huffington Post, the match-up connects it to a wider audience. In December, AOL had about 112 million unique visitors to all of its sites. The Huffington Post had about 25 million. Despite its rapid visitor growth in recent years, the Huffington Post still lacked the resources to expand aggressively and it remained too small for a public stock offering, Ms. Huffington said.
"There was no way we could do all these things on our own with our current resources," Ms. Huffington said in an interview.
Huffington Post is on track to generate more than $50 million in revenues this year, AOL said. The company started turning a profit in the third quarter of 2010, rounding out the full year in the black, according to a person familiar with the matter.
The company declined to comment on the size of Ms. Huffington's stake in her site. Softbank Capital, Oak Investment Partners, chairman and co-founder Kenneth Lerer and Ms. Huffington together own a little more than 50% of the company, according to a person familiar with the matter. Other investors hold the remainder.
On Monday, the Huffington Post said that several top officials would be stepping down, including Mr. Lerer, CEO Eric Hippeau and Chief Revenue Officer Greg Coleman. Mr. Coleman had worked at AOL until Mr. Armstrong came in.
Ms. Huffington and Mr. Armstrong crossed paths in November at a conference in New York. At the end of a panel discussion in which Mr. Armstrong participated, Ms. Huffington approached him from the audience and told him she thought they had similar views on content. The next day, the two met at Mr. Armstrong's New York office to continue their discussion and they met several more times throughout November and December.
The week after Christmas, Mr. Armstrong and Mr. Minson, the CFO, flew to California to have lunch at Ms. Huffington's house. "At the end of that lunch, we said, 'I think we're interested,"' Mr. Armstrong said.
The lunch kicked off a month of talks that culminated in a deal reached on Sunday night.
