Tuesday, February 08, 2011

Way back, what was then just plain AOL orchestrated quite the coup by merging with what was then Time Warner. AOL shareholders gave up a piece of a company with make-believe value (as was the case with all dot.com companies) for a piece of a company with real assets and real profits. Time Warner shareholders, on the other hand, came out terrible, giving up 100% of a real company in return for a piece of a company whose then-astronomical value was made up of smoke and mirrors.

So it is somewhat poetic justice that AOL shareholders are today giving up real value (in the form of $300 million of cash) in return for a business whose valuation is built on a fairy tale foundation.

AOL buying the Huffington Post is built on the idea that advertising supported news sites are a viable long term business proposition. AOL figures that that their ad sales team is going to sell millions upon millions of dollars of advertising on the Huffington Post content pages.... not only now, but for the foreseeable future.

Way back, the business plans for dot.com companies seemed to consist of nothing more than what I refer to as "build it and they will come", with 'they' being defined first as visitors and then as money.

And today, AOL's strategy in buying the Huffington Post is the same... buy the content and 'they' will come, with 'they' being advertisers paying lots of money for the privilege of advertising on all the pages the wonderful content team of the merged operation can manage to put out every day.

There's only one wrinkle... a fly in the ointment... (I believe) most web advertising is NOT cost effective, the advertisers do not realize a positive return on their advertising dollar. Unlike TV and print advertising, the web provides advertisers with an immediate ability to track the revenue they receive from their advertising. They know when an ad works, they know when an ad doesn't work.

And since, with very few exceptions, online advertising doesn't lead people to click, and people who don't click don't buy.

It isn't because there's anything inherently wrong with the advertising... it is that people going to (content) web sites don't go for the ads, the ads are a distraction from what they're looking to see. People filter out the ads.

And advertisers will soon have to face the fact that they're not getting a positive return on the ad expenditures. The fad of 'having to have an Internet marketing strategy' will fade as company after company realize that was just something the marketing agencies made up in order to persuade advertisers to spend money.

And when the advertisers realize this, they're going to stop paying the asking rate and, if they advertise at all, will demand much lower prices... which will destroy the businesses whose models are based on having a steady stream of advertisers wanting ad space on their web sites.

Granted, AOL didn't have a lot of options. Sooner or later, even the grandpas and grandmas still on dial up would realize they didn't need to keep sending to AOL every month. AOL's revenue curve was pointing in the wrong direction. To their credit, they didn't freeze, they did act. But unfortunately for AOL shareholders, AOL management wasted $300 million of cash that could have gone for something worthwhile.