AOL and Huffington Post merge: A good deal for both sides.

Commentary about business and finance.
Feb. 7 2011 4:36 PM

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Why the AOL and Huffington Post merger is a good deal for both sides.

Arianna Huffington. Click image to expand.
Ariana Huffington

Last week AOL, that sclerotic Web 1.0 giant, got caught with its pants down. Business Insider, the cheeky, gossipy business site, published a copy of "The AOL Way," a cringe-worthy memo detailing how the company planned to win the future. It seemingly underscored AOL's intention to turn itself into a content farm, generating cheap, dumb, search-engine-optimized infotainment. It set outrageous click and content goals: increasing the number of stories from 33,000 to 55,000 a month, boosting page views per story, and bumping up the production of video content. It said 95 percent of stories should be optimized for Internet searches—meaning stories more of the "how to wash your cat" variety than the "the growing reach of the Muslim Brotherhood" variety.

Annie Lowrey Annie Lowrey

Annie Lowrey, formerly Slate’s Moneybox columnist, is economic policy reporter for the New York Times.

The memo ginned up howls from the blogosphere. And aside from its questionable strategic message, the plan appeared to make little sense. How did AOL plan to ramp up content production so quickly? Hadn't AOL pumped a ton of money into producing high-quality journalism, via sites like Politics Daily?

Early on Monday, a missing piece of the puzzle fell into place. AOL announced its acquisition of the Huffington Post, the fast-growing, left-leaning aggregator and news site. The New York Times called the bedfellows "unlikely." Gawker snarked, "Somewhere, right now, Tina Brown is trying to sell The Daily Beast to Compuserve." But in light of last week's memo, the merger makes perfect sense. AOL does not plan to become the AOL outlined in "The AOL Way." That Web site exists already—it's called the Huffington Post—and AOL plans to purchase it for $315 million. It seems like a good deal for both sides.

AOL's $315 million, about $300 million in cash and $15 million in stock, gets it all of HuffPo's content and staff, along with its 25 million or so unique visitors a month. The Huffington Post is private and does not release its financial figures. But it says it turned a profit in 2010 and that its 2011 sales should come in at around $60 million. Its value has tripled in two years—reasonable, given increases in traffic. And the total AOL valuation comes in at about five times revenue. That's high, but hardly an insane amount, given HuffPo's profitability, strong brand, and growth potential.

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Here is how the deal will work. Arianna Huffington will become the head of a new entity called the Huffington Post Media Group. She will retain editorial control of all content at HuffPo, and will take over editorial control of AOL's existing sites, including Moviefone, the influential tech blog TechCrunch, citizen-journalism site Seed, and local-news site Patch. According to the New York Times, the staffs at the various news organizations will likely merge, meaning the seasoned journalists at AOL's reported sites Politics Daily and Daily Finance will become HuffPo writers.

So what makes the whole shebang worth it? Well, the deal makes sense for Huffington herself: She retains editorial control of her brand and gets to run a far bigger business to boot. It also makes sense for HuffPo's investors, getting a payout 8½ times what they put in. And it makes sense for HuffPo itself. The company gains considerable infrastructure to help it grow, including video-production capabilities and a strong local-advertising and local-news network. It also picks up readers and page views, via the niche news sites, AOL's international reach, and its considerable existing pool of visitors.

The merger is an even better deal from AOL's end, as it hastens the company's transition from utility provider to content producer. Back in the 1990s, of course, AOL had a smashing business: connecting people to the Internet through their phone lines, then providing them with e-mail and a landing site once they were on the Web. At one point, one-half of Americans logging on did so via AOL. But that business quickly fell apart in the broadband era. In 2002, the company had 35 million paying subscribers. Today, it has about one-tenth that number.

In the summer of 2006, AOL officially recognized it had to evolve or die. It explains in its latest annual report: "[W]e fundamentally shifted the primary strategic focus of our business from generating subscription access revenues to attracting and engaging Internet consumers and generating advertising revenues." But that transition has not happened smoothly. AOL built or purchased an odd mish-mash of sites: Nobody really knows what they are getting when they click over to AOL. The business still relies on the old model, getting about 80 percent of its profits from subscriptions, not ads. And in the fourth quarter of 2010, revenue declined 26 percent year-on-year, with ad sales off 29 percent.

The merger won't necessarily solve any of these problems, of course, and it raises some new questions: Will HuffPo's political tilt make AOL uncomfortable? Will the traffic and advertising numbers add up? Will AOL end up firing many of its own journalists? Will the company continue to need to shrink to survive? How much will readers trust it?

But at the very least, the acquisition of HuffPo helps AOL forge a path to become a news and media company, rather than a dying former utility, and quick: Rather than building a brand, AOL is simply scooping one up. The business model—the "AOL Way" has always been the "HuffPo Way"—is not high-minded, but it seems popular enough. A huge network of unpaid contributors, such as Jenny McCarthy, blog on the site. Aggregators pull together news from other papers and magazines, tacking on search-friendly headlines and keywords to draw in visitors. All that traffic supports a small, but growing, group of paid journalists turning out often-excellent reported work. People might pooh-pooh the "how to wash your cat" stories. But those SEO-driven blasts, for better or worse, pay for the "growing reach of the Muslim Brotherhood" stories.