AOL: Bet on Starboard
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Is the AOL (NYSE: AOL) Tim Armstrong – Arianna Huffington show on short time? Its tone and content may well be if Starboard Value gets its way.
As an activist investor with about 5.2% of AOL stock, Starboard has delivered to its leadership a blistering criticism of the direction and provided concrete recommendations for a turnaround. Here is a copy of Starboard Value's press release. And here is AOL’s response. Starboard’s number-one beef is that AOL has not tapped into the value of its Intellectual Property. To help address that, it proposes five new board members who have either or both digital and financial expertise: Ronald S. Epstein, Steven B. Fink, Dennis A. Miller, Jeffrey C. Smith, and James Warner. In his annual letter to shareholders, Warren Buffett observes, "The primary job of a Board of Directors is to see that the right people are running the business and to be sure that the next generation of leaders is identified and ready to take over tomorrow."
Being global media stars seems to have been fun for Armstrong and Huffington. For example, it provides a ticket to appearing on stage at the World Economic Forum in Davos. As investors know, the Armstrong-Huffington team has been playing a high profile, expensive game of providing breaking news, hyper local coverage through Patch, and provocative commentary that goes viral. They justify that strategy as what brings in online advertising.
But that might not be where it should be putting so many of its chips. Its strength is not in that niche, at least not yet. According to eMarketer, expectation for AOL’s 2012 market share is at 3.9%, versus Facebook’s at 19.4% and Google’s (NASDAQ: GOOG) at 12.3%. Even Microsoft's (NASDAQ: MSFT), at 4.8%, is poised to do better. Given AOL's extreme attention to content, investors should be asking why aren't the experts anticipating better ad numbers for the company?
Where Armstrong and Huffingon should be focusing is on the technology platforms for web and mobile, for the current time and the next few years. This myopia mirrors that of News Corp’s (NASDAQ: NWS) Rupert Murdoch who loves newspapers, a dying industry. As a result, the company is preoccupied, including putting out fires related to hacking/bribery scandals, with that publishing segment. Instead it should be consumed with what technologies the company should be betting on and developing or acquiring. For example, the dog fight out there, in which Comcast (NASDAQ: CMCSA) recently bared its teeth at the alpha presence Netflix, is related to online video. Remember NBC, in addition to broadcasting, streamed the SuperBowl. Will News Corp also experience a revolt by activist shareholders? They ought to be concerned about the state of the technology in the company's film, cable, and television segments.
In this era when technology talks and investors listen, Starboard is in the position of strength. Starboard wants to unlock the value in on AOL’s portfolio of 800 patents related to Internet technologies. They are for hot functions such as enhancing the secure transmission of data, providing step-by-step travel instructions, and improving search in fields such as shopping. Some of these patents will be expiring. Starboard puts their value at $1 billion. As we know from Google’s purchase of Motrola Mobility for $12.5 billion for the 17,000 patents, ownership of or at least the license for patents is everything. Even king of the web and mobile market Apple (NASDAQ: AAPL) has adopted a strategy of suing alleged infringement of its patents by Android manufacturers and sellers. Kodak hopes to get back on its financial feet by selling, under the supervision of U.S. Bankruptcy Court, its 1100 digital patents.
Armstrong argues that AOL has made “significant progress.” Its stock price is about 80% higher than where it had been in 2010. But, that of course is said in a relative context. AOL had hit the skids, we recall. And media expert Ken Auletta has long been pessimistic about its ability to turn itself around. Way back in January 2011, Auletta published a damning analysis in THE NEW YORKER. All this is ironic since Armstrong cut his technology teeth while working at GOOGLE. If it looks like Starboard will not be able to exert its influence, investors may look at running away from AOL.
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