Yahoo! Inc. (YHOO): AOL, Inc. (AOL)’s Fundamentally Flawed Strategy

If anyone ever figures out the local content puzzle, it will be a nimble start-up with an innovative vision, luck, and a step forward in technology. AOL doesn’t separate out the results for Patch, its local content business, but it has been a huge money-loser. According to estimates published in The Wall Street Journal, Patch spent $160 million in 2011 while generating very little revenue.

Last month, AOL decided to downsize Patch — reducing staff, sites, and costs — to improve profitability. I’m not sure if profitability at Patch is possible; more likely, it will continue generating losses. But rather than abandon his money-losing pet project and admit defeat, Tim Armstrong is going to keep it going (and probably lose more shareholder money).

AOL’s flawed content strategy is destroying value
Last year, AOL’s content business lost $33 million dollars. The year before, it lost $48 million. Those losses might be acceptable if AOL’s content business were an early-stage venture that was growing rapidly and likely to become profitable at a certain size.

In fact, its business isn’t growing at all — it’s been flat for the past three years. And even more distasteful is that AOL spent heavily, externally and internally, to build this collection of money-losing content businesses. The cost of Huffington Post alone was $315 million.

Foolish bottom line
AOL, Inc. (NYSE:AOL) needs a radical change of strategy. It should shutter or scrap its losing content business. Cash generated from the dial-up business should be invested in more sustainable and profitable ventures. Failing that, it should be returned to shareholders.

The article AOL’s Fundamentally Flawed Strategy originally appeared on Fool.com and is written by Brendan Mathews.

Brendan Mathews is short shares of AOL. The Motley Fool has no position in any of the stocks mentioned.

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