Analysis Indicates AOL Hemorrhaging Cash Thanks To Patch, Other Woes

It's been ~10 months since we first covered AOL's desperate plan to reinvent itself and reclaim a strong position in the online industry, but the company's efforts aren't yielding the results it promised. The company announced a major reorganization earlier this month, while recently leaked documents indicate just how bad the situation has become.

Much of the company's financial woes are attributable to Patch. Patch is AOL's attempt to create web communities and advertising focused on specific real-world towns and communities. In theory, users in such areas are hungry for online sources that cover their own local news and events. In practice, things don't seem to be working out that way.

That tagline is ironic considering that the other 27 states of the Union seem to be living just fine sans Patch

One problem with Patch is immediately obvious upon visiting the website. Even if you live in a state Patch covers, there's no guarantee Patch pays attention to either your city or a nearby town. The author lives in a small town in upstate New York that's within a 90-minute drive of Syracuse, Buffalo, and Rochester. The metropolitan population of those three cities is nearly three million, not counting the towns in between. Patch eschews covering any of them; the vast majority of the site's communities are in and around New York City.

This focus underlies one of the website's major problems. Anyone who lives in New York's other metropolitan areas visits, finds absolutely nothing related to their own community or anything near it, and doesn't bother going back. There's no way to quickly and easily turn hyperfocused local content into advertising revenue or to scale local coverage into regional writing.

So how much money did Patch lose? Business Insider thinks Patch lost at least $100 million this year, which would make it a definite boat anchor in terms of AOL's overall business performance. AOL CEO Tim Armstrong bet on Patch as a way to differentiate AOL from the likes of Google and Yahoo; personalized, community-focused news is the engine he bet would drive readers to AOL-owned properties.

It's not working well. Worse, it's not clear it'll ever work well. The problem with Patch is that it's trying to drive revenue based on a relatively small number of sales in a huge market. Margins are small, site expansion is both time-and-labor intensive, and there's no sign of a crucial tipping point that'll start driving readers en masse to AOL properties.

AOL's primary revenue generators are its search and access business segments, both of which are shrinking as customers move away from dial-up. It's not clear that the company has time enough to develop a new business plan, and Patch, as currently implemented, is going nowhere fast. Then again, it's been a decade since AOL was anything but an also-ran in the tech industry--one could argue that the onetime giant's major accomplishment has been dragging out its twilight this long.