As you can see, it is imperative that AOL, Inc. (NYSE:AOL) become innovative in developing ways to keep up with the competition and stop growth declines. To make that happen, it has tried to diversify its business model. It has explored all matters of businesses in an attempt to maintain a presence in the Internet. Many of these are working, including Huffington Post, MapQuest and TechCrunch.
And then there is Patch. Doomed by critics as a failure almost from the first day its first hyper-local site was launched, the business has yet to turn a profit. With CEO Tim Armstrong at the helm, AOL has spent a small fortune on it – to the tune of $100 million. Patch was built on the premise that it would be very well sought-after because it offers community news and happenings tailored for affluent cities and towns throughout the country. That may be the case, but the issue boils down to its convincing businesses to advertise on the sites, which basically serve niche audiences. Business owners know they can use their advertising dollars to reach a broader audience by going through any of AOL’s competitors.
Despite this seemingly huge disadvantage, AOL has pushed forward with Patch. During the conference call, it was reiterated that Patch will be profitable by the fourth quarter of this year.
“On the advertising side, I’d say the same thing I said during the Q4 call, which is, we are under a constraint to really move the company towards profitability by Q4,” Armstrong said. “And that profitability focus is coming with some trade-offs in revenue in other cases where we’re still growing revenue, but we’re really focused on maneuvering the entire brand to profitability.”
Armstrong went on to try to quell concerns that Patch is taking too long to achieve profitability.
“The average Patch has been up for about 26.5 months right now. And as a media property and an investment property, whether you look at magazines, cable channels, or any of those things, it usually takes five to eight years for those things to get to profitability,” Armstrong said. “So [for Patch] you have a very, very fast process at AOL in terms of optimizing the platform, the products, the ad products, the people, and the communities around doing that.”
Armstrong went on (and on and on) about how great Patch is, and how the company was focused on making it profitable. While there are critics of Patch and its effects on AOL’s earnings, there is optimism among market players. Cowen & Co. analyst John Blackledge noted last week that his firm had initiated coverage of AOL with an “outperform” rating. This is partly based on the company possibly increasing its earnings per share next year by as much as $0.51 due to Patch.
There is no better way to respond to AOL’s insistence that Patch makes sense as a business and is worth dumping money into than the classic movie line, “show me the money.”
The article For AOL, Patch Profitability Is Key originally appeared on Fool.com is written by Tedra DeSue.
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