BUSINESS

AOL CHIEF'S WHITE WHALE FINALLY SLIPS HIS GRASP

Staff Writer
Columbus CEO

c.2013 New York Times News Service

Tim Armstrong, the chief executive of AOL, is finally winding down Patch, a network of local news sites that he helped invent and that AOL bought after he took over.

At a conference in New York last week, Armstrong suggested that Patch’s future depended on forming partnerships with other companies, an acknowledgment that AOL could not continue to go it alone in what has been a futile attempt to guide Patch to profitability. He called it, somewhat hilariously, “an asset with optionality.” There may be a few options for Patch, but none come close to the original vision for the site.

The hunt to own the lucrative local advertising market, Armstrong’s white whale, is over. But Patch did not go quietly — hundreds of people lost their jobs over the past six months — and neither will Armstrong.

“Patch has more digital traffic than a lot of traditional players have,” he said in a phone call Friday, still defending his pet project. “The long-term vision was clear: If you get the consumer, can you get the revenue? And we have a whole bunch of Patches where the answer is yes. But we rolled it out on a national basis and we’ve had to adjust based on the investor commitments that we have made.”

As he spoke, he said that the turnaround at AOL as a whole was going well, and the market seems to agree — the stock is up 45 percent this year and advertising revenue has gone up every quarter. He said that overcoming the worst merger in business history — the company was finally spun out from Time Warner in 2009 — required “big bets in white spaces of opportunity,” some of which worked out, and some, like Patch, that didn’t.

But Patch was not just one more bet. When the boss has a big idea, the employees treat it as the more equal among equals.

That is not how things usually go when a digital executive is in charge of a company. Silicon Valley is built on a series of rapid failures until a winner emerges. It is a fundamental tenet of the digital era that the losers are quickly shot and slid off into the river. “Fail fast forward,” goes the saying at Facebook and elsewhere.

But Armstrong had a sentimental, and some would say arrogant, attachment to Patch. He helped create it in 2007 while a senior executive at Google. When he got the top job at AOL in 2009, he persuaded the company to buy it. Patch then proceeded to churn through leadership, business models and write-downs on the way to its reduced state.

The board of AOL, handpicked by Armstrong, authorized him to invest $50 million on the idea in 2010 and after that, it became a black hole for cash. By the end, it had cost an estimated $300 million.

Armstrong’s big dream had become a nightmare that wore out his shareholders and set off a proxy fight in 2012. The hedge fund Starboard Value LP ran for three seats on AOL’s board, saying it did not believe Patch was a “viable business.”

The insurgents lost the war, but turned out to be right. Armstrong warded off the proxy challenge by engineering a $1.1 billion sale of AOL patents to Microsoft and returning much of that value to the shareholders, but the additional time — or was it rope? — that he secured did not change the outcome.

Analysts who follow the company are less interested in Patch than in Armstrong’s management of the broader enterprise, and several I spoke to give him high marks, even counting Patch.

“He has been very transparent,’’ said Benjamin Schachter, a media analyst at Macquarie Group. “He made it clear to investors that Patch was going to take a lot of resources to make this business work, that there were significant challenges. While it has been clear that it has been very difficult for him — he really wanted it to work — he told investors he would make the necessary cuts if it didn’t and now he is.”

As a graduate of the Google school of dreaming big — when he worked there, Armstrong helped expand a sales force that clobbered much of the rest of the media economy — Armstrong is nothing if not a true believer. Even though Patch is being dismantled or perhaps sold off to various partners, he still believes that he had the right product in the right space, and that he just ran out of runway.

That runway ended because of a schedule he set. In May 2012, he promised restive investors on an earnings call that he would make Patch profitable by the end of 2013. That page of the calendar arrives this month while profitability remains on a far shore, so Armstrong is reluctantly throwing in the towel.

“At the end of the day, could Patch have been run better? We don’t know,” he said. “We were doing this while we navigated turning around the rest of the company. Patch was one of the big bets that we made, among others, and I still believe local will be a big opportunity whether it is Patch or someone else.”

The theory was that Patch would use a single news person and a single advertising person, at least initially, to create a digital maypole in hundreds of communities at a cost of about $100,000 annually per site. Patch sites popped up across the country, like in Calabasas, Calif., and Nashua, N.H., covering high school sports, city elections and other local fare.

The execution risk was large — Patch was all moving parts, many undermanaged. At its peak, some 900 sites employed 1,400 people. Much of the journalism was pedestrian, while some of it, especially during Hurricane Sandy, was deeply important, but the decision to start at such a large scale was crippling. And all local efforts, digital or not, confront the tyranny of small numbers. Both the journalism and the ad sales were hand-to-hand, a retail effort that required spending a lot of money to go after pretty small revenue.

In August, it was clear that the math would not work. More than 350 people at Patch were laid off and hundreds of sites were shuttered. Just in case observers did not understand that it was an emotional moment for Armstrong, two minutes into a companywide meeting explaining the closings, he publicly fired Abel Lenz, the creative director of Patch, for taking a picture of him. It was embarrassing for everyone, and he apologized several days later.

Armstrong came close to betting the company and his future on Patch, but in the end, his survival instincts and shareholder pressure compelled him to let the white whale swim away.

But he still cannot quite admit that it is over. In the phone call Friday, Armstrong talked about impending partnerships and stressed that Patch was “moving toward” profitability. Patch, even in its death throes, is ever nascent, still rising, on its way to a future only its founder sees.