You’ve Got Mail: AOL Going Back to the Basics
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
AOL Inc. (NYSE: AOL) CEO Tim Armstrong announced on Thursday that the company will rely less on acquisitions and more on developing its own products, acknowledging that it was “candidly less focused on the creation aspect” in 2011. This statement follows a flurry of acquisitions late last year, resulting in a third quarter loss of $2.6 million. Moving forward, AOL will look to video, advertising, and subscription services for the bulk of its revenue. And it’s about time.
Since 1994, AOL has acquired over 50 predominately web-related companies, including 9 in the past two years. The latest of these pick-ups, The Huffington Post, came with a price tag of $315 million and despite increasing advertising revenues has done little to offset declines in sales. The company’s weak profits have been further weighed down by its ongoing investments in Patch, an online news and opinion site that AOL bought in 2009.
But it appears for the time being that AOL has had a change of heart. Armstrong has made public that he doesn’t foresee any major acquisitions in the near future. Instead, the company will attempt to build its share of the mobile advertising market, grow its sales of subscriptions, and increase its profits from previous investments such as Patch. AOL is also joining forces with Bonnier’s Parenting Group by featuring Parenting.com articles on affiliated websites in an effort to attract advertisers; the websites offer an estimated audience of 12.5 million viewers.
This should come as good news to potential AOL investors who have watched the company dragged down by its heavy spending. Its original success in the 1990’s was fueled by innovation, yet the company has done little to increase its position in the interim period. Now, according to Armstrong, it intends to “execute and be a stand-alone company.” This in the wake of a split from Time Warner Cable (NYSE: TWC) in 2009, a move that will ultimately benefit AOL if it can once again become a self-reliant business.
Whether or not AOL will be able to adapt to changing technology in an era when mobile internet is increasingly complicating the profitability of web-related companies is yet to be determined. One thing is for sure, however; it will not survive through acquisitions alone. Throughout history, more than enough conglomerates have outgrown themselves to demonstrate this lesson to Armstrong, and it appears he has heeded the warnings. When AOL is once again, as he claims, a “stand-alone” company capable of inspiring confidence in consumers, then we will once again see the business thrive as it did in its early days of prosperity. Until then, AOL is just another post-bubble internet company with cash burning a hole in its pocket.
Robert Coleman does not own shares in any of the companies mentioned in this entry.