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American Express Co
Bank of America Corp
In the fall of 2009, a group of journalists and publishers gathered in Manhattan to hear Jeff Jarvis, a Web evangelist and blogger, deliver a talk about the bright future of “hyperlocal” news. Jarvis told the assembled group that even as small- and mid-sized papers were closing down, community journalism was being remade by thousands of independent, local bloggers. And these solo news artists appeared to be making good money: Bloggers working in communities with 50,000 individuals were pulling in $200,000 a year in advertising revenue, according to a study from the City University of New York’s Graduate School of Journalism, where Jarvis is a professor.
Two-and-a-half years later, the notion of bloggers making six-figure incomes by chronicling town hall meetings, police blotter reports, and high school sports looks more like a fading dream than a bankable reality. Case in point: AOL (AOL). On May 25, a group of investors known as Starboard Value—which owns 5.3 percent of AOL and is fighting for three seats on the board of directors—published a lengthy critique of the company’s management. The sharpest words were reserved for AOL’s continued, heavy investment in Patch, the company’s network of 863 locally staffed community news sites, which AOL CEO Tim Armstrong founded and sold to AOL after joining the company. In 2011, according to Starboard’s estimates, Patch lost $147 million while generating a mere $13 million in ad revenue—roughly $15,000 per site. “We do not believe Patch is a viable business,” the Starboard report said.
The skepticism goes beyond AOL. In 2011, Allbritton Communications (the owners of Politico) scaled back its investment in TBD.com, an ambitious hyperlocal news site for the D.C. area. Likewise, Washington Post Co. and New York Times Co. have pulled back from their investments in online local newsgathering. Across the Atlantic, Guardian Media Group shuttered its hyperlocal experiment last year, noting that the project had proven unsustainable.
A big part of the problem is that display advertising—the expensive banner ads that serve as the financial engine behind most media sites—has fizzled at the local level. According to Starboard, in 2011 AOL executives hoped to sell 80 percent of their Patch ads to restaurants, spas, and other community businesses. Instead, local merchants bought a mere 18 percent. Approximately 70 percent of those who did give Patch a try failed to renew their contracts.
Starboard argues that cost-conscious local advertisers prefer online ads with an immediate payoff, such as Google (GOOG) search ads, where an advertiser pays only when someone clicks on an ad and can tell whether a click leads to a sale. Banner advertisements are good at gradually building an emotional connection between a consumer and a business—which is not too important if the business is a bed-bug exterminator.
Exacerbating the situation, the Patch sites include a box of text ads served by Google. Starboard estimates that local businesses can buy a Google text ad on a Patch site for just 5 percent of what Patch’s salespeople ask for a display ad. And big advertisers were never seduced. According to a survey conducted by Starboard, national advertisers consider hyperlocal sites an inefficient way to communicate with large numbers of consumers. The report quoted one anonymous “senior advertising agency director” saying that “our clients have never asked us for hyperlocal advertising, and we don’t see a need with a national product.”
An AOL spokesperson declined to comment regarding the Starboard report and instead pointed to positive signs for Patch. CEO Armstrong has said he hopes revenues will grow to more than $40 million in 2012. Earlier this year, Patch unveiled a regional ad team hoping to drum up sales that fall between the local and national level. Patch’s current national clients include American Express (AXP), Bank of America (BAC), and Walgreens (WAG).
From a content perspective, hyperlocal sites simply aren’t essential reading. Matt Booth, head of interactive local media at researcher BIA/Kelsey, says that people tend to use a search engine 109 times a month. They visit local websites one to two times a month. And the advertising dollars follow the traffic. “The question for these hyperlocal sites is how do you get frequency way up,” says Booth. “People only really need or desire these sites a couple times a month. The rest of their information requests are satisfied elsewhere.”
Alan Mutter, a media consultant and journalism instructor at the University of California at Berkeley, says that Patch has proven the inherent flaw of the hyperlocal business model—namely that it requires an expensive salesforce to convince small businesses with meager marketing budgets to buy ads on sites with limited consumer appeal. “The economics don’t work,” says Mutter.
The bottom line: A group of activist investors says AOL’s Patch is a flawed business in which revenue averages a mere $15,000 per site.