AOL's Purchase of HuffPost Could Be a Stroke of Genius -- or Another Horrible Blunder

By Acquiring the Wildly Successful Online News Portal for $315 Million, Can the Internet Company Once Known as America Online Overcome Its Reputation for Making Bad Business Decisions -- From Its Failure to Adapt to the Rise of Broadband, to Its Disastrous Merger With Time Warner?


(Posted 11:30 a.m. EST Tuesday, February 8, 2011)

NOTE TO READERS: Due to a computer crash, this week's column is being posted six hours later than normal. We apologize for the delay.


When the announcement hit the business-news wires Monday, it struck with the force of an earthquake measuring 7.0 on the Richter scale.

The Huffington Post, a five-year-old Web site that began as a blog but grew into one of America's largest online news sites, has reached an agreement in principle to be acquired by the once-dominant Internet service provider-turned news portal AOL Inc. for a reported $315 million.

According to the announcement, posted Monday on both the HuffPost and AOL Web sites, Arianna Huffington, the co-founder and editor-in-chief of the HuffPost, has been named president and editor-in-chief of the enlarged company -- to be known as The Huffington Post Media Group -- which will include all HuffPost and AOL content, including Engadget, TechCrunch, Moviefone, MapQuest, Black Voices, PopEater, AOL Music, AOL Latino, AutoBlog, Patch, StyleList, and others.

In a blog posting on HuffPost explaining her reasons for the sale, Huffington dismissed concerns about the sale tarnishing HuffPost's liberal editorial reputation -- or the apolitical reputation of AOL's news operations.

"Far from changing our editorial approach, our culture, or our mission," she wrote, "this moment will be for HuffPost like stepping off a fast-moving train and onto a supersonic jet. We're still traveling toward the same destination, with the same people at the wheel, and with the same goals, but we're now going to get there much, much faster."

Many longtime HuffPost readers, however -- particularly those on the political left -- are likely to be highly skeptical. And from a business perspective, given AOL's checkered past, the deal has a 50-50 chance of being either a brilliantly successful move -- or another of AOL's horribly disastrous blunders.

Wall Street so far isn't impressed. AOL stock fell 3.4 percent Monday to $21.27 a share on news of the HuffPost purchase and as of 11:30 a.m. EST today (Tuesday) dropped another 2.784 percent to $20.60 a share.


AOL is a company that is saddled with one of the worst public reputations of any Internet-related firm in the country -- a reputation that stems from a series of decisions the company has made over the past decade for which it was not fully prepared and for which it has never fully recovered -- to the point that AOL today is a company seeking an entirely new identity.

And AOL's poor reputation could potentially put HuffPost at serious risk of both editorial and commercial disaster, Huffington's new position as president and editor-and-chief of the expanded company notwithstanding.

AOL -- formerly known as America Online -- was founded in 1983 as Quantum Computer Services (renamed America Online in 1991) and quickly became the most dominant Internet service provider (ISP) in the United States. At its peak in the late 1990s under CEO Steve Case, AOL had become the ISP of choice for millions of Americans who were unfamiliar with computers, eventually eclipsing its rivals, CompuServe and Prodigy with its now-iconic "You've Got Mail!" greeting and online games.

But over the years, AOL made a series of decisions that proved to be disastrous for the company. AOL initially charged its subscribers by the hour, but in 1996 switched to a flat monthly rate. While this proved to be wildly popular with AOL subscribers, it resulted in a massive overload of AOL's servers, resulting in thousands of subscribers cancewlling because they kept getting busy signals when they tried to log on. AOL soon became the butt of jokes, with its initials derisively referred to by disgruntled users as "Always Off-Line" or "A-O-Hell."

The situation got so bad that it prompted Case to appear in an AOL television commercial in which he told viewers that the company was "working day and night to fix the problem."

AOL, with its dial-up Internet service via telephone lines, failed to keep up with changing Internet technology such as DSL and high-speed broadband, which were much faster and could carry far more graphics-heavy data than dial-up -- costing the company even more subscribers.

To this day, AOL's largest source of revenue remains its increasingly obsolete dial-up Internet service and e-mail. The problem is, most of AOL's 5.2 million remaining Internet-service subscribers are people for whom high-speed broadband is either unavailable (particularly in rural areas) or unaffordable; have obsolete computers that cannot handle today's graphics-heavy Web pages and/or they cannot afford to replace them.


In 1999, the National Federation of the Blind filed a class-action lawsuit against AOL, accusing the company of violating Title III of the Americans With Disabilities Act for not making its proprietary software compatible with screen readers used by the blind to convert information appearing on computer screens into synthesized speech or a refreshable Braille display.

The NFB argued that AOL's extensive entertainment, sales and other services make it a "public accommodation" that is required under the ADA to to be accessible to people with disabilities.

AOL and the NFB reached an out-of-court settlement in 2000.


But of all of AOL's missteps, none proved to be more disastrous to the company than its ill-fated merger with media conglomerate Time Warner in 2000 -- a deal that former Time Warner chairman and CEO admitted in a rare interview with CNBC's "Squawk Box" a year ago was "the worst deal of the century" and the business network called a corporate "marriage from hell."

Levin acknowledged his failure to foresee the dot-com bubble that burst in 2002 when he and Case announced the merger of AOL and the parent company of Time magazine and CNN on January 10, 2000. "I was the CEO. I was in charge," he said. "I'm really very sorry about the pain and suffering and loss that was caused."

The merger wasn't actually a merger in the truest sense of two companies combining into one. In fact, it was an acquisition, with AOL buying Time Warner for a staggering $164 billion in AOL stock -- which, as it turned out, was grossly overvalued. After the dot-com bust, the value of the combined company's stock plunged by 90 percent, which cost thousands of Time Warner employees their jobs and wiperd out their retirement savings.

For his part, Case acknowledged that he and Levin spent too much time focusing on internal company politics -- "and, frankly, on Wall Street" -- and spent too little time on "innovating for customers, and seizing the day."

Time Warner finally unloaded AOL in December 2009. When stock in the newly-independent AOL began trading on the New York Stock Exchange, it was valued at only a fraction of what it was a decade earlier, at $2.8 billion, according to stock-market analysts.


AOL's current chairman and CEO, Tim Armstrong -- eager to shed the company's tarnished image -- has concentrated on transforming AOL into a diversified online media giant and that its acquisition of the HuffPost is a major step toward that transformation.

"The acquisition of The Huffington Post will create a next-generation American media company with global reach that combines content, community, and social experiences for consumers," said Armstrong. "Together, our companies will embrace the digital future and become a digital destination that delivers unmatched experiences for both consumers and advertisers."

As president and editor-in-chief of the enlarged company's editorial operations, Huffington, said Armstrong, "is a singularly passionate and dedicated champion of innovative journalistic engagement and a master of the art of using new media to illuminate, entertain and enhance the national conversation."

Left unclear is whether the enlarged company will continue to bear the AOL name, given Huffington was put in charged of of what has been dubbed The Huffington Post Media Group.

Also left unclear is whether the HuffPost, with its image as a left-leaning news site, will move to the center -- or whether AOL's news operations, seen until now as apolitical, will take a left turn.

Given the toxic history associated with the AOL name, a change of brand identity might not be so bad. Nonetheless, only time will tell whether AOL's acquisition of the HuffPost will be a stroke of genius or another horrible corporate blunder.

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Copyright 2011, Skeeter Sanders. All rights reserved.



Tags: AOL, Huffington Post, AOL, Huffington Post (all tags)


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