AOL and HuffPo – Media’s Race to the Bottom?

Dan Lyons over at The Daily Beast nails it in his look at the AOL acquisition of The Huffington Post for $315 million.

The big problem that everyone in online media faces is that advertising rates keep falling. …

One response to that has been to say that if each page is worth less, then we must have more pages. Thus we now have “content farms” like Demand Media which flood the Web with low-cost, low-quality content that is basically spam. But this drives advertising rates down even further.

Last summer when I did my article about Huffington Post for Newsweek, I estimated that they had about 25 million monthly readers and would generate about $30 million in revenues in 2010. That meant they were getting a mere $1 dollar per reader per year!

Compare that to the world of cable TV or print newspapers and magazines which collect hundreds of dollars each year from each subscriber, and then generate hundreds of millions in ad revenue on top of that–and you see the difficulty of the business that AOL and Huffington Post and all the rest of us are in.

Declining online ad rates is not just AOL’s problem it is a problem for everyone in the media business.

Tim Armstrong, the CEO of AOL has received lots of criticism for his “AOL Way” which focuses on SEO and keywords to improve the value of AOL content without any mention of improving the quality of AOL journalism.

However, this is the stark reality of online media today: value is measured in clicks and pageviews. There is no direct measure of the quality of a piece of content.

For example, looking at my work. It can take me more than a day to go visit a company in SIlicon Valley, talk to people, drive back, write and then publish the story. Or, I could stay at my desk, write up a few news items based on emails and phone calls and write four or five posts in the same amount of time. I’ll get more traffic by staying at my desk than driving and getting that one original interview — which I’d rather do.

Fortunately, I’m not paid by pageviews on SVW but most news organizations do pay journalists by pageview.

Tim Armstrong runs a large media company. His focus is on large numbers and not on the individual quality of AOL journalism. He is a realist. Just like Demand Media does, he can calculate how much money a piece of content can make for AOL. He is not looking for Pulitzers because Pulitzer content cannot be monetized.

The challenge for AOL will be in transitioning to a new media business model, the one being pioneered by Demand Media.

It’s always easier to go from the ground up, as Demand Media is doing, than to try to shoe-horn a legacy business model into the new model — which is what AOL, and most everyone else, is trying to do.

AOL’s acquisitions will give it some breathing room because Wall Street will be trying to figure out the performance of the new and the old AOL and that won’t be easy — at least for a couple of quarters.

[Cross-posted at Silicon Valley Watcher]

About Tom Foremski

Tom Foremski is a former Financial Times journalist. He has been covering Silicon Valley since his arrival from London in 1984. In May 2004 he became the first journalist to leave a major newspaper to make a living as a journalist blogger, publishing Silicon Valley Watcher - reporting on the business and culture of innovation. Tom’s understanding of diverse technologies and his access to global business leaders, make him one of the most prominent media influencers in the technology world.