AOL has finally ditched Patch, giving up control by selling the majority stake to investment firm Hale Global for an undisclosed amount. Of course, the Rayno Report tipped you off to this many moons ago and predicted the stock would rise on the expectation.
Last October, I reported that AOL was looking to get out of patch by the end of 2013. Two months later, the New York Times picked up on our scoop. The only problem was they didn’t even have the scoop.
This was a big black eye for AOL and CEO Tim Armstrong. But now it’s over, and investors are happy. They’ve been wanting AOL to dump the project for years, they never liked it. “Undisclosed amount” can be translated to mean: Too embarrassing to tell you.
What’s surprising to me is that Armstrong is not feeling more heat on this. It was a boondoggle. Armstrong self-dealt Patch to AOL, as he was won of the founders of Patch and invested $4.5 million of his own money in the company. It was sold to AOL for $7 million in 2009. Although Armstrong recused himself from the deal, giving up the profit he made the investment and converting his stock into AOL shares, it still looks bad.
But the worst part of it was that it was a terrible idea. Here’s why:
- Community news is a terrible business. I spent the first five years of my life in community publishing, and I decided I needed to get out. There is no money in local pizza and bar advertising. The proof of this is that Bloomberg reports that Patch reached $70 million in sales laste year, only $78,000 per site. The average cost to operate each site was $140,000 to $180,000, according to Armstrong.
- Patch was fragmented and could not be centrally controlled or sold. How can you possible align a strategy with hundreds of editors in hundreds of small communities around the country? Worse yet — how do you sell ads for that from New York? Community ads are not like big Internet ad networks. They are bought and sold in the community, on Main St., with boots on the ground.
- AOL had a habit of continually over-promising and under-delivering on Patch. This indicates to me that they didn’t do very good analysis. As recently as last year Armstrong said that Patch could be profitable.
All this being said, this was obviously a good event for AOL stock, which has been rising steadily, partially on the expectation that it would finally dump patch, which cost the company hundreds of millions of dollars in losses.
(Disclosure: No position in AOL stock.)