Is AOL Insane?

Content is king at AOL (NYSE: AOL  ) , but it may be a demented monarchy.

BusinessInsider.com has unearthed a presentation that the meandering dot-com giant is reportedly using to train its editorial ranks. AOL intends to dramatically ramp up its content this quarter, but it will be easier said than done.

Starting with a baseline of 33,661 monthly articles generating a median of 1,512 in page views, CEO Tim Armstrong is aiming for a run-rate of 55,000 monthly content pieces by the end of the quarter.

That goal is obviously doable. Content mills Demand Media (NYSE: DMD  ) , Yahoo!'s (Nasdaq: YHOO  ) Associated Content, and even AOL's own Seed and Patch.com prove that quantity isn't an obstacle in a world of unlimited freelancers looking for work.

It's actually the rest of the goals that seem unreasonable. AOL wants to bump up its media page views per article to 7,000. It also wants to go from incorporating video in 4% of its stories to more than two-thirds of its owned pages. Oh, and it also wants to lower the average cost per piece of content by 15%.

Some of these goals may seem mutually exclusive, but AOL's margins will fly through the roof if it succeeds.

Unfortunately, the odds are stacked against it.

AOL wants to use magnetic headlines, social promotion, and some search engine optimization to get the ball rolling, but "Lady Gaga goes pantsless in Paris" -- an actual example in its 58-slide presentation -- can only take you so far.

It's easy to see why AOL is pushing for content. Demand Media had a blazing hot IPO last week, tagged with an enterprise value in the ballpark of AOL. However, AOL may be overplaying its hand here.

Subscription revenue has fallen by 26% over the past year, as broadband-savvy consumers continue to cancel the iconic access provider's service. This would be fine if folks are flocking to AOL's free ad-supported content, but that's not faring any better. Advertising revenue for AOL in 2010 also clocked in 26% lower than a year earlier. Compare that to Yahoo!, where display advertising is actually growing despite its struggles elsewhere.

Drumming up more content for a shrinking user base isn't going to turn things around. It is the right approach, but AOL's lofty goals just aren't realistic.

It may be too late for AOL to hand off its fading access business to EarthLink (Nasdaq: ELNK  ) or Juno parent United Online (Nasdaq: UNTD  ) . It will never challenge Yahoo! for free-mail supremacy, especially as folks continue to shed their @aol.com addresses.

There's nothing wrong with imitating what works. Groupon was a hit, so AOL has repositioned its Wow.com domain as a local deal site. Cool. Hyperlocal advertising has potential, so it recruits a fleet of freelancers willing to work for $25 an article. Fine. As we speak, executives may be practicing "I am Demand Media" before a mirror. Great!

The problem with aiming too high, though, is the morale-crushing letdown when April rolls around and the company falls short on one or more of its goals.

Good luck, AOL. It's not easy to go fishing in a pond that hasn't been restocked with fresh eyeballs in some time.

Start flexing that bended knee, Yahoo!.

Do you think AOL and Yahoo! will join forces in 2011 as some speculated last year? Share your thoughts in the comment box below.

Yahoo! is a Motley Fool Global Gains pick. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz wonders if AOL will ever party like it's 1999. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy, and it's got mail.


Read/Post Comments (5) | Recommend This Article (7)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 02, 2011, at 4:22 PM, ligers6044 wrote:

    Sure and of course. AOL is moderately insane. Or maybe just dumb. How about more quality and less quantity? How about actually dumping off all the dialup customers to a spin-off - or to EarthLink? And who really wants more video? That's just too slow. Video when appropriate, sure. But just for the sake of talking heads or Al Gore style slide shows? I don't think so. Hot females in minimal outfits works. But there's enough porn and semi-porn on the net already. Maybe AOL should just shut itself down. Sell the pieces and everyone get new jobs.

  • Report this Comment On February 03, 2011, at 9:36 AM, Brent2223 wrote:

    I think more video is a bad move too. The news is rarely so complicated that I need to watch a video to 'get it' - they should just focus on doing a good job writing the articles and pull the plug on the bells and whistles.

    On a related note, I see MF has started using videos. Personally I've never watched one and probably never will. I see videos as gimmicky distractions, not anything providing attention value to the written word. No disrespect to the players, just the medium. Maybe one day.....these are interesting transitional times we're living in.......

  • Report this Comment On February 03, 2011, at 11:13 AM, mikenpdx wrote:

    i rarely watch videos embedded in articles either. you can't skim through a video.

    of course if its more appropriate to show video, ex. showing footage from protests in Egypt, I might watch but for the most part I prefer to be able to skim through the article.

  • Report this Comment On February 03, 2011, at 2:31 PM, pscholte wrote:

    Interesting comment on Lady Gaga...years ago I told AOL enough with the "Kate Gosselin Appears on Beach In Bikini," or "Kardashian sisters offered $50000 to bare it all." PUH-LEASE! Enough already. (My definition of "news" must be radically different from the adolescents with their "Playboys" giggling behind the counter in the AOL newsroom.

  • Report this Comment On February 03, 2011, at 2:38 PM, lctycoon wrote:

    Frankly, I'm disgusted with America's fixation on celebrity news. More people know who Michael Jackson is than know who their Congressman is. I can't deny that such idiocy sells, though.

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