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Why AOL Bought TechCrunch

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AOL (NYSE: AOL  ) went on a shopping spree earlier this week with a focus to boost its Web content. It scooped up popular tech blog TechCrunch and acquired Web-based social-networking software maker Thing Labs and Web video-syndication company 5min Media.

Though the value of the deal is small -- CNBC sources claim AOL agreed to buy TechCrunch for $40 million, while Business Insider put the number $25 million -- it underscores AOL's plan of building an Internet-content business sustained by advertising.

AOL CEO Tim Armstrong and TechCrunch founder and editor Michael Arrington signed the deal on Tuesday at TechCrunch's Disrupt conference in San Francisco. Although AOL already owns rival tech blog Engadget, Armstrong said the two brands will "operate independently and leverage each other."

AOL's revenue has been slipping ever since it split up with Time Warner (NYSE: TWX  ) last year. In the most recent fiscal quarter, the company said it incurred a net loss of $1.06 billion, or $9.89 per share, and that revenue slipped by 26% year-over-year to $584.1 million. The primary reason for the decline was falling advertising revenue.

Like Internet rivals Google, Yahoo!, and Microsoft, online advertising revenue accounts for a major portion of AOL's total revenue. However, AOL has struggled to monetize its Web content. For the quarter that ended in June, the company said advertising revenue fell by 27%.

AOL said its U.S. display-advertising business fell by 7% in the quarter ending in June, while international display-advertising business dropped by a whopping 52% as the company scaled down its presence in France and Germany.

The company's search and contextual-advertising business also declined by 28%.

To set itself right, AOL began streamlining its business and sold its ICQ instant-messaging service, digital-ad firm, and social-networking site Bebo. The company also has rolled out a new Web mapping service and migrated the majority of AOL mail users to an improved email platform. In August, it renewed a search agreement with Google for five years that expands the companies' decade-long partnership to include mobile search and online video content.

Tuesday's acquisition of Thing Labs will let AOL get its hands on Brizzly applications and include them in its Lifestream social aggregator and publisher, as well as its AIM messaging platform. Brizzly apps allow users to view and post updates to social-networking sites Facebook and Twitter and enable group chat. The founders of Thing Labs, who will join AOL, previously helped create Google Reader.

AOL saw the 5min Media acquisition as a "missing piece in the AOL value chain," as it completes the company's "end-to-end video offering from content creation through syndication and distribution to the consumer experience and monetization."

The 5min Media company owns a library of more than 200,000 videos, covering topics such as fashion, cooking, and fitness, from more than 1,000 media companies and independent video producers.

However, the TechCrunch acquisition is different, in that it will give AOL instant access to the blog's massive stream of online readers. Many of those readers are venture capitalists, angel investors, technology executives, and other high-net-worth individuals. According to comScore, TechCrunch and its network of websites had 3.8 million unique visitors in August, the third highest among technology blogs. The first two were Gizmodo (6.5 million) and AOL-owned Engadget (7.5 million).

The deal will also boost AOL's content portfolio, as it brings into AOL's fold specialized industry websites that TechCrunch owns, such as MobileCrunch, CrunchGear, CrunchBase, and GreenTech.

Most importantly, the deal will boost AOL's editorial operation. Arrington is regarded as a high-profile, outspoken, talented, and passion-driven editor. In fact, part of the deal stipulates that Arrington stays with AOL for at least three years. He has expressed excitement about joining AOL's team and said he would "continue to set the agenda for insight, reviews, and collaborative discussion about the future of the technology industry."

"There are incentives for me and the team to stay," he said.

However, it will be interesting to see how Armstrong manages Arrington, who has chronicled the rise and fall of technology companies and is as feared as he is revered for his unorthodox tactics in the technology world. And Arrington said he has no intention of changing.

"I'm still going to occasionally cause a bit of a ruckus," he said, adding that "we have absolutely no editorial bounds at all."

Arrington is an entrepreneur first, and then a blogger. But according to Engadget founder Peter Rojas, being an entrepreneur could be hard in AOL, which, like any big company, can be "saddled with way too many layers of management."

Shares of New York-based AOL closed up 1.13% to $25.03 on Friday.

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