AOL Bets $315 Million on Arianna, Buys Huffington Post to Build 'New American Media Company'

Patch, TechCrunch, Engadget and the Rest of AOL's Sites Will Form New Entity, Huffington Post Media Group

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NEW YORK ( -- In one of the biggest digital publishing deals in recent memory, AOL has agreed to pay $315 million for the Huffington Post, the pioneering web-only newspaper co-founded by Arianna Huffington.

The deal is AOL CEO Tim Armstrong's latest and boldest attempt to transform the declining company from one that helped millions of people get onto the internet through dial-up connections to one that informs and entertains them in a broadband world, or as he called it, a "new American media company."

Arianna Huffington
Arianna Huffington
"Arianna, I think, represents something very significant," Mr. Armstrong said in a call from Cowboys Stadium, where both he and Ms. Huffington were awaiting the start of Super Bowl XLV in a luxury suite, and where the final details of the deal were hammered out. "The future of the internet will be a lot more driven by females, and it's great to have an entrepreneur of Arianna's stature, which for AOL is very important -- we wanted Arianna's voice at AOL, and for her to help us creatively."

The deal also puts Ms. Huffington at the core of AOL's transformation. As part of the deal, AOL will form a division called Huffington Post Media Group including all of AOL's content properties from its local division Patch to its blogs such as TechCrunch (which AOL acquired in December) and Engadget, as well as its homegrown properties, which will be run by Ms. Huffington as president and editor in chief.

Ms. Huffington said, with characteristic verve, "We're very excited -- we're in Dallas with the Super Bowl. It's my first Super Bowl, and my first big deal!"

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The Huffington Post is privately owned by editor-in-chief Arianna Huffington and chairman Ken Lerer, who founded the site in 2005 with $2 million in seed capital and subsequently raised $35 million in venture funding from Greycroft Partners, Softbank Capital and Oak Investment, as well as from former AOL chief operating officer Bob Pittman. AOL will pay for $300 million of the purchase price in cash.

Last year the Huffington Post, which draws 24 million readers and generates around 500 million page views every month, according to ComScore, brought in $31 million in ad revenue, or a little more than $1 per user per year. The addition of Huffington Post will increase AOL's audience 22%, according to Mr. Armstrong, but more importantly infuse the company with the Huffington Post's expertise: aggregating and creating low-cost news and information for mass audiences.

Focus on local
AOL's Patch unit, a series of hyper-local news sites, will be folded into Huffington Post, which has long sought to expand its local-content strategy. Local advertising has become a closely watched sector given the growth of locally focused startups such as Foursquare and Groupon. AOL made new investments in Patch this past year, expanding into 775 towns across the U.S. Each town has its own website with typically one editor and a handful of freelancers, a content-production model similar to the Huffington Post, which runs on an army of more than 6,000 unpaid bloggers and a paid staff of 88 editors and writers, all posing more than 600 articles a day.

Ms. Huffington, 60, will relocate to New York as part of her new role, though she said she will still maintain her home in Los Angeles and will go back and forth. "We're going to start a napping room in New York office so we can take naps in between working hard bringing the two great teams together," she quipped.

The Huffington Post has grown at a phenomenal clip, going from 4.5 million monthly readers in 2008 to around 24 million every month this past year, coming close to The New York Times' monthly online audience of 30 million, but the Times' numbers may drop once it institutes its paywall later this month. The two websites are often compared against each other to underscore the wildly divergent news-gathering ethos between the two with the presumption that the lower-cost, mass-generated model may eventually triumph over the more-established one.

Recent courtship
Mr. Armstrong had eyed the Huffington Post as a possible acquisition since coming to AOL in 2009, but according to both he and Ms. Huffington, they hadn't significantly met until very recently. "I've been a substantial long-time fan," Mr. Armstrong said. "But I was only a first-time caller a few months ago."

"Honestly, we weren't necessarily looking to do anything," Ms. Huffington said about the acquisition, though she did admit that a number of other companies had been interested in possibly purchasing the Huffington Post over the past year. But when she and Mr. Armstrong met at the Quadrangle conference in November, Ms. Huffington recalled that she was very impressed with what he said. "We met the next day, and it was just an amazing meeting of visions," she said. "I explained all that I wanted to happen, and he talked about where he wanted to go."

"Arianna is the best content-DJ on the web," Mr. Armstrong said, prompting Ms. Huffington to crack he had beaten her with the better teaser quote. "I'll have to come up with something now," she said.

In many respects, the acquisition appears to work in the favor of both companies, as Ms. Huffington said she was "looking to double-down in growth" this year. And for AOL, the Huffington Post represents a successful low-cost content model that can still bring in a significant audience, an enticing prospect for Mr. Armstrong who sees original content as essential to the company's long-term success.

Bid for ad revenue
The New York-based portal has languished in the past year, pulling in $2.41 billion in revenue for 2010, a 25% drop from the previous year. But Mr. Armstrong has purposefully pruned the often cluttered advertising from AOL's wide-ranging properties, as well as slowly shed its legacy internet access business, which still accounts for 39% of the company's revenue. The CEO is banking on fewer but bigger ads that will have more appeal to people online.

Underscoring that strategy, AOL recently released a new large-size advertising unit called Project Devil that was deployed at the end of last year. The company has also submitted the unit to the Interactive Advertising Bureau as a possible new standard within the display-advertising industry.

But AOL still has its work cut out for it. The company's share of total online display advertising fell to 5.3% in 2010 from 6.8% in 2009, according to eMarketer, and its display- and search-advertising revenue declined in the most recent quarter. AOL took in $151.1 million from display advertising during the last three months of 2010, a 14.3% drop from the same period in 2009. Search revenue, meanwhile, fell 33.7% to $96.4 million, but that is partly a function of its shedding its legacy dial-up or internet access business, which still drives a lot of its search-advertising revenue, as users who access the internet via AOL tend to use its search feature. The company has a revenue-sharing agreement with Google, which powers the underlying search engine.

While AOL's ad revenue has declined, Google's and Facebook's have grown, signifying the changing nature of user's online habits.

Turnaround in 2011
Mr. Armstrong said the company should see a turnaround by the second half of this year. Folding in the Huffington Post will clearly boost AOL's bottom line, but he sees the acquisition as having more than just an additive effect: AOL can now tap into its expertise in driving social traffic, as well as its plays into cause marketing, which Mr. Armstrong thinks will appeal to big brand marketers.

"We're going to have the largest company focused on helping brands online," he said, "and Arianna's group is great at growing content through the community, through cause marketing and with local content." Ms. Huffington added that adding women's lifestyle categories to Huffington Post has become a successful part of its growth strategy, an area that Mr. Armstrong had also been looking to grow.

"We're building the new American media company," Mr. Armstrong said.

But the more immediately pressing concern for him and Ms. Huffington was the Super Bowl, which was about to begin in a few hours. When asked who they were rooting for, Mr. Armstrong said the Patriots, "but they're out, so the next closest would be Green Bay, because my wife went to the University of Wisconsin."

And Ms. Huffington?

"I've been told by Howard Fineman," -- the journalist who recently jumped from the ailing Newsweek to Huffington Post -- "that I need to root for the Steelers," she said. "So I guess we're already in disagreements," she said mockingly. "It's going to be so very fun."

Follow Edmund Lee on Twitter.

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