More thoughts on the AOL-Huffington Post deal

The acquisition of The Huffington Post has been getting a lot of coverage and analysis since the deal was announced at midnight Monday morning U.S. Eastern time. The two big questions center around "Why?" and "Is The Huffington Post worth $315 million?". The answers to both questions are tightly related.

Consider the following:

• AOL's revenues and profits have been declining for years. As revenues from dial-up data service have declined, advertising revenues haven't increased enough to compensate.
• AOL has a mix of content and services, some of which accumulated from AOL's years as a data service powerhouse, some of which was developed internally, and some (like the former Weblogs, Inc. blogs and TechCrunch) were acquired specifically to increase traffic.
• Patch and Seed, AOL's internally-developed hyperlocal news service and content farm respectively, aren't generating the traffic or revenues that AOL needs to turn its financial results around.

Last week, Business Insider published a copy of the "cookbook" that AOL implemented to run its content businesses. And, it's literally a cookbook--the roles and actions of just about every employee are mapped out on a day-by-day and hour-by-hour basis, with the goals of increasing traffic and advertising revenues while bringing down the costs of content acquisition and production.

Consider that you're AOL CEO Tim Armstrong and the opportunity to acquire The Huffington Post comes along. It's going to be expensive. Is it worth it? Here's what he could have been thinking:

• The Huffington Post would add almost 30 million unique visitors a month to AOL, increasing AOL's traffic by almost a third.
• The HuffPo claims that it generated $31 million dollars in revenues in 2010, and its 2011 revenues and profits would be immediately accretive to AOL.
• The HuffPo has a small advertising salesforce, led by a former AOL sales executive. If AOL's much larger salesforce took over The Huffington Post's sales, it could generate more revenue from the same traffic.
• The quality of The Huffington Post's writing is much better than that coming out of AOL's own Patch and Seed. Further, unlike AOL's services, much of The HuffPo's content is comes from two low-cost sources: 1) Rewrites of articles and blog posts from other sites, and 2) Articles and blog posts submitted by often well-known writers and celebrities, for which The HuffPo pays little or nothing.
• AOL could get The HuffPo for $315 million, a price at the low end of what industry analysts said the property is worth (Bloomberg News quoted Shahid Khan of MediaMorph, Inc. last December when he said that The HuffPo was worth $300 to $450 million at that time.)
• AOL has $750 million in cash, more than enough to make the acquisition.

Put all of that together, and the decision to acquire The Huffington Post was easy. However, it's not without risks:

• There's no guarantee that Arianna Huffington is going to be able to be any more successful with AOL's existing media properties than AOL has been in the past. Those properties that have never gotten off the ground or are "circling the drain" may continue to stagnate.
• Writers who have contributed articles and blog posts to The HuffPo at no charge may begin demanding payment. The HuffPo is no longer a feisty startup with a left-of-center orientation--it's the central media property for a multi-billion-dollar business, run by an executive who one source to Business Insider said is "one of the most conservative people around." Why would anyone contribute their work to AOL for free, when they would at least get paid by AOL's Seed content farm? That will increase The HuffPo's cost of content.
• If many of the popular writers for The HuffPo leave, the quality of the site's writing is likely to decline, taking site traffic with it.
• There's no word on how long Arianna Huffington or her key managers are obligated to stay with AOL. Historically, AOL has had very little success with retaining key managers and engineers from companies that it acquired, and The Huffington Post isn't likely to be an exception. If Arianna Huffington leaves, will AOL be able to continue to attract the same number and quality of contributors?

In short, the acquisition makes sense for AOL, and it was a smart move on Tim Armstrong's part. However, it's not at all clear that The Huffington Post won't deteriorate under AOL in the same way that many of AOL's other media properties have. Armstrong purchased a short-term "shot in the arm" for AOL's revenues and profits, but it's now up to him and Arianna Huffington to grow the business over time.