Rough Times for AOL’s Patch? Investors Say Yes, AOL Says No

AOL (NYSE:AOL) may not agree, but many believe the online company’s local news enterprise, Patch, is in real trouble. The venture has expanded rapidly, but the profits haven’t been forthcoming, says a CNN Money report.

AOL chief executive Tim Armstrong co-created Patch in 2007 to fill the gaping media hole left by the disappearance of local newspapers in the U.S. Using embedded editors, Patch posts local news stories and keeps a calendar of neighborhood activities. About 14,000 bloggers and 1,000 professional journalists provide content.

AOL acquired Patch in 2009 for an estimated $7 million when Armstrong took over leadership of the company, and it became fundamental to AOL’s switch to being an online media firm. However, ever since AOL acquired Patch, its profitability has been questionable. It has expanded to 863 sites across the country, but AOL has been sunk $160 million into the venture so far, with little to show for it, said the report. AOL made only $20 million last year from Patch.

According to the report, a former AOL executive asked not to be identified said “Basically, there [were] two ways to do it: get the product perfect in one market or go for a land grab approach.” The company chose the land grab, said the executive, and went all out with spending and hiring staff. “They went all in before they perfected the product and, in retrospect, that wasn’t ideal,” the executive added.

Investors, including activist fund Starboard Value LP, have been alarmed by the spending compared with earnings. Starboard sent out a public letter last December chastising management, said CNNMoney.

However, Patch President Warren Webster said, “We’re not losing money — we’re investing. We’re not struggling. And we’re not a turnaround.” Webster pointed out that Patch attracts about 10 million individual visitors or about 1,159 readers for each site. He added that Patch traffic more than tripled in 2011, and progress is being made in 2012, with revenues for this year already at 50 percent of what the company made in 2011.

To contact the reporter on this story: Gina Smith at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com