AOL sells Patch

The grand experiment of hyper-local journalism being conducted by an online company is over. AOL announced today that it would sell a majority of Patch.

William Launder wrote in the Wall Street Journal that the deal would be especially hard for AOL CEO Tim Armstrong since he founded Patch:

AOL Inc. AOL -1.25% has reached a deal to sell a majority stake in its Patch local news network to Hale Global, an investment firm specializing in turnaround situations.

The deal marks AOL’s effective exit from Patch, after years of trying to make the venture and its 900 local news sites profitable. For AOL Chief Executive Tim Armstrong, the deal has particular significance, as he helped found Patch before joining the Internet company, which acquired Patch around the time Mr Armstrong became CEO in 2009.

Under the deal, which is expected to close in the first quarter, AOL will transfer Patch to a new company majority owned and operated by Hale Global. AOL will retain a minority interest. Financial terms weren’t disclosed.

Hale Global describes itself as a “technology holding company” that specializes in turning around distressed businesses. The firm has a low profile in the world of digital media, but counts executives including Bobby Figueroa, a former executive at Google Inc. and Yahoo Inc., YHOO -0.17% among its staff.

In a joint statement, the companies said that Hale Global had “substantial experience in the areas of online media, local marketing, mobile, retail and advertising.” The companies said they planned to relaunch Patch, with changes aimed at making the sites appeal to mobile users and across social media.

The Financial Times story by Emily Steel outlined the weight Patch has been on Armstrong’s tenure:

Patch has been a lightning rod for criticism throughout Tim Armstrong’s nearly five-year tenure as AOL’s chief executive. Mr Armstrong was a co-founder of Patch, which AOL acquired for less than $10m in 2009 as part of a broader strategy to capitalise on predictions for fast growth in local digital media markets.

“Patch is an important source of information for communities, and the joint venture we created has a unified mission to provide local platforms and hyper-local content,” Mr Armstrong said.

Mr Armstrong saw Patch as a community news outlet that could prosper as traditional local media, such as newspapers, suffered steep declines in advertising and subscriptions.

But the strategy came under fire, particularly amid a 2012 proxy battle with Starboard, the activist investor that lambasted the investment. Mr Armstrong promised that Patch would be profitable by the end of 2013 or that AOL would sell it, seek partners of shut it down.

Struggles at Patch have weighed on AOL and Mr Armstrong as he pushes the company through its transformation from its roots as a subscription-based internet provider into an advertising-supported digital media company.

The New York Times story by Leslie Kaufman pointed out that AOL could see some revenue if Patch becomes profitable:

The financial terms of the deal were not disclosed. But the companies said that AOL would put Patch into a new limited liability company, which will be majority owned and operated by Hale. The deal effectively removes Patch from AOL’s financial books.

However, as a minority stake holder, AOL could benefit if Hale were able to make Patch profitable. Patch’s traffic continues to grow and in November passed 16 million unique visitors.

Patch has been a personal passion of Mr. Armstrong’s, and also a bit of an albatross. He helped create the network while at Google in 2007 and, upon arriving at AOL, was behind the decision to buy it in 2009. But Patch expanded too quickly and became unwieldy.

Over the years, Patch lost between $200 million and $300 million dollars and was the subject of a proxy fight as investors lost confidence. Mr. Armstrong had to promise to pare back his vision, and last year fired hundreds of staff members. There were no details on staffing plans announced at the time of the deal with Hale.

Edmund Lee wrote for Bloomberg Businessweek about the company’s finances — or lack of them:

AOL Chief Executive Officer Tim Armstrong had told investors he planned to turn Patch into a profitable business by the end of last year. As part of that effort, he eliminated about 500 positions, or close to half of its 1,000 employees, in August. The job eliminations cost the company between $14 million and $18 million, according to a filing at the time.

Patch was a pet project of Armstrong, who helped found the startup in 2007 by investing $4.5 million of his own money, allowing it to begin with coverage of three townships in northern New Jersey. It was sold to New York-based AOL for $7 million in 2009. Armstrong, as AOL’s CEO, recused himself from the deal and forfeited the $750,000 he made in profit. He also returned the $4.5 million he recouped from the sale in exchange for shares in AOL.

Patch reached about $70 million in sales last year, or about $78,000 per local site, up from $16 million in 2012. The average cost to operate each site is $140,000 to $180,000, Armstrong had told investors, leaving a wide chasm between revenue and expenses.

It’s yet another sign that media companies are having a hard time figuring out how to turn a profit in an increasingly online and digital world. Maybe having business executives run the local news outlets will help them find new revenue streams.