Two years after their merger, seated side by side in a corner conference room at AOL’s (AOL) Manhattan headquarters on March 20, Chief Executive Officer Tim Armstrong and Huffington Post founder Arianna Huffington say they couldn’t be happier. “Our relationship is the strongest it’s ever been,” Armstrong says, adding that he’d happily sign a new contract to keep Huffington past February 2015. She’ll re-up, she says, provided he stops throwing things at her. (She’s joking.)
When Armstrong paid $315 million for HuffPo in early 2011, he sought to reposition AOL away from its declining dial-up Internet access and search businesses in favor of ad-supported original content sites. His other gamble: making Huffington, the left-leaning doyenne of cable talk shows, the face of the new company, with a four-year contract and control of all of AOL’s editorial content, including Patch, TechCrunch, and more than a dozen other sites. The Arianna brand had digital cachet: She launched her news aggregator in 2005 largely on personal charm and connections, and built it into a clicks machine whose Web traffic, when AOL bought it, matched that of the New York Times. Announcing the acquisition, Armstrong called Huffington “a master of the art of using new media to illuminate, entertain, and enhance the national conversation.”
Armstrong, like Huffington, is media-savvy and idea-driven. Credited as a principal architect of Google’s (GOOG) ad-sales operations, he jumped to AOL’s top job at 38 when Time Warner (TWX) spun off the company in 2009. He’s built a reputation for being patient with products—notably Patch, the money-hemorrhaging local-news hub—but fickle with people, having fired a string of high-level managers. Just how these two outsize personalities would cohabit was one of the big unknowns surrounding the merger, by far Armstrong’s biggest acquisition.
Despite the smiles and repartee, their relationship has been strained by HuffPo’s heavy spending and lackluster ad sales, and they’ve both explored the idea of dissolving the partnership, according to three people familiar with the conversations who were not authorized to speak on the record. Armstrong and Huffington say that’s untrue. By last year, however, Huffington’s responsibilities had been scaled back to just HuffPo, and in the last few months, Armstrong has begun to surround her with his allies on the business side. Jimmy Maymann became HuffPo CEO—at Huffington’s request, he says—and Armstrong made AOL board member Susan Lyne CEO of AOL’s Brand Group, which includes HuffPo, though Huffington still reports to Armstrong. Outside investors approached Huffington last year about buying the site from AOL, but Armstrong and the board refused to sell.
Huffington says that although there were tensions at the outset—both use the word “bumps”—that was to be expected: “We never said this was going to be an easy ride and that everything went smoothly.” Of the buyout attempts she says, “Since these offers were very significant, I felt I would bring it up to Tim, and that was an absolute no on Tim’s part and the board’s part, and that was great. I knew the best way for this child to grow was within AOL, because Tim really believed in it, and everything he said he would do to invest in it he did 100 times over.”
HuffPo’s monthly unique viewers have soared to 45 million in the past two years, rising by an average 22 percent per month in the second half of 2012, according to data from market researcher ComScore (SCOR). The site’s benefited greatly from links on the AOL.com home page, still a traffic fire hose thanks to longtime and former dial-up users who check the portal. AOL’s overall traffic has seen little net growth, hovering around 110 million monthly uniques since as early as February 2010, the ComScore data show.
Corporate sponsors have bought into HuffPo, and its founder is one big reason. “Arianna certainly fits the bill for someone who is a thought leader,” says Craig Bierley, head of global advertising for Cadillac (GM), a principal backer of HuffPo’s online video network, HuffPost Live. “She aligns with the audience we want. Affluent, educated, informed, she has all that.” Other sponsors include Hyatt Hotels (H), HBO, and the Economist, upscale advertisers who consider HuffPo a like-minded venue, says Michael Winter, a managing director at PhD, a media-buying agency within Omnicom Group. From clickthroughs to lead generation, he says, “the campaigns do well on HuffPo. That’s what ultimately matters.”
AOL’s stock soared last year, thanks to a $1 billion sale of old patents, and in February the company notched its first quarterly sales growth in eight years, largely from a third-party ad-sales business whose automated systems help other Web publishers sell ad space.
AOL’s own ad revenue has struggled, though; online ad rates have dropped industrywide, falling as much as 23 percent in 2011, according to a report from Ignition One, a digital ad-buying firm. Part of the problem is the explosion of real-time ad bidding platforms, which often drive down CPM rates, the prices websites can charge per 1,000 ad views. Display advertising has remained flat at AOL, generating $169.8 million in the last three months of 2012 vs. $170.6 million a year earlier, according to financial disclosures—and that was during the heat of a presidential election cycle.
HuffPo claimed its first-ever profitable year shortly before Armstrong’s purchase, generating $35 million in 2010. It hasn’t turned a profit since, Armstrong says, though he declined to provide specific numbers. Instead, AOL continues to coast on its legacy properties, including its dial-up access and search businesses and the patent sale.
Armstrong blames HuffPo’s red ink on HuffPost Live and the site’s foreign spinoffs, currently staffed in six other countries. He declined to project when Huffington’s operation would make money again, but both say her responsibilities were pared down so she could focus on making the flagship site what Armstrong calls a “truly global brand.” In January, she and HuffPo CEO Maymann launched a two-year plan with that goal. Armstrong, whose own contract runs out a year after Huffington’s, may need to see results sooner.