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March 10, 2011, 10 a.m.

The newsonomics of AOL/Patch buying Outside.in

Editor’s Note: Each week, Ken Doctor — author of Newsonomics and longtime watcher of the business side of digital news — writes about the economics of news for the Lab.

There are two ways to be local, we’ve learned.

You can create local news, as newspapers, TV, and some radio stations — and more recently, tens of thousands of bloggers — have done. Or you can aggregate local, sorting through what those newspapers, TV and radio stations, and bloggers have created, picking up what you want, lifting a headline and quick summary and providing a link.

Over the years, the aggregators have often laughed — not publicly, of course — at those silly people who sink millions into creating local news, or content of any kind, while creators have joked — sometimes publicly — that some day those aggregators will have to turn out the lights, when all the content creators have gone bankrupt and out of business. Creation is hugely expensive, when all you have to do is build a better algorithm, scoop up what’s already there, organize it better than someone else, and sell advertising against it. That’s why the first decade of this century has been largely the decade of the aggregators, with the Googles, Yahoos, MSNs and AOLs, among the leaders in aggregation — and revenue.

So as much as AOL CEO Tim Armstrong talks about sparking a content revolution and creating lots of original content, in the background, he also needs to up his aggregation game, using more and more of other people’s content. That’s how I read the recent announcement that AOL’s Patch is buying Outside.in, a company that uses technology to roundup local content, dividing it into the categories of local news and local blogs — and which has partnered with newspaper companies in its four-year history. (Sadly, the memorable url construction, owing to an Indian .in domain, will probably fade into history.) It’s a small play, but one that may have bigger impact on the emergence of hyperlocal news — and local advertising/marketing dollars — in the years ahead. Let’s look at the newsonomics of the Outside.in deal, and what it tells us about the future of Patch itself and AOL’s play to get bigger audiences faster.

The deal — for a purchase price of less than $10 million — is small when compared to the investment ($14.4 million) put into Outside.in by some high-profile investors (Union Square Ventures, Marc Andreessen, John Borthwick, Esther Dyson, and CNN) and when compared to AOL’s $315 Huffington Post buy. It’s tiny, also, when compared to AOL’s spending of $606 million for 14 acquisitions since the beginning of 2010 — a number, of course, that itself pales against Google’s 48 purchases for $1.8 billion over roughly the same period.

Yet it parallels the HuffPo buy in a major way: It’s an attempt by AOL to get bigger faster. Look at AOL’s financials and it’s clear Armstrong is in a race against time. As one savvy newspaper veteran pointed out to me last week, AOL looks, ironically, a lot like a newspaper company. It has a legacy circulation product, in slow, but unmistakeable decline — its AOL-brand Internet access service — and a digital ad business (in turnaround mode) that isn’t growing fast enough to turn the company sustainably profitable in the future. So The Huffington Post not only pasted the face of Arianna atop the site, in hopes her followers will follow, but acts as the wished-for rocket fuel for overall company traffic growth over the next couple of years, especially as the election season, with its political interest, dawns once again.

Patch is part of that strategy for audience growth, drawing into AOL customers through the local pipeline.

The Outside.in deal aims to do a simple thing to support that growth: create more page views around local content, at a lower cost to AOL. Or putting it even more simply: bulking up Patch, on the cheap.

And isn’t that what critics of fast-growing Patch — more than 800 served up across the country, the fastest-growing news startup and hirer of journalists in the last several years — have said since Armstrong and Patch President Warren Webster announced its hypergrowth plan last summer. For all of you who have said, “I don’t get the business model, they’re paying too much for content,” Armstrong and Webster apparently agree with you.

Patch still needs to make its one editor/reporter per Patch pencil out, but it can do something about the costs of lassoing other content. Peruse the Patches around the country — mainly on the coasts, but with a growing representation in the Upper Midwest — and you see lots of vitality and lots of variable quality. At the top sites, you’ll find the site updated with posts and tweets every few hours, and that owes itself both to the hard-working Patch editors (10-plus hour days are still not uncommon) and their ability to pull in good stringers. The budget for those stringers actually varies by the month, as Patch balances budgets and getting its allocations right. Take a bigger Patch site — serving a city of 80,000, for instance — and it may get more than $2,500 a month in freelance budget, while smaller ones serving communities of 20,000 may only get $1,200.

What Outside.in offers Patch is a new tool to manage how much local content it offers through aggregation — rounding up news from other local sources, including local dailies and weeklies and blogs, and how much it decides to pay for directly. Add Outside.in to Patch pages and you may get the sense of a fuller news report, Patch+. Sure the plus requires readers to link off the site, but that’s the nature of the aggregation game. You get more readers to come to because you’ve created one of the largest centers of local content. If you do it right, you can be ahead of the game — and trim costs.

Let’s look at it on a pure cost basis. If Patch gets 1,000 sites up and going, which should happen this year, and it can trim what it spends on stringers by an average of $500 per site per month, that’s $6000 a year in savings per site. For the Patch network in general, that’s $6 million a year. With Outside.in costing no more than one and a half times that number, you’ve paid for the acquisition in less than two years. (Of course, there are also ongoing operating costs as Outside.in CEO and able web serial entrepreneur Mark Josephson and some other team members join Patch.)

The tweaking, of course, is both about the algorithm — tour Santa Cruz Outside.in today, and the top five news stories are from the local Patch!; where’s the local daily, the Sentinel? — and in the content model. What’s the mix of paid, fresh voices and local aggregation that pulls in, and retains, audience?

That question is, of course, what leading local newspaper sites have been trying to figure out as well. A number of newspaper partners of Outside.in itself have tried, without significant commercial success, to figure out the formula. Other sites like SeattlePI.com have used aggregation (SeattleTweets) and innovators from the Miami Herald to the Journal Register papers have signed up local bloggers, in distribution and ad-revenue-sharing programs. All of these are works-in-progress at getting the local original content creation/aggregation model right.

Patch could get it right, or righter, and become a more formidable challenger to local newspaper sites — especially as they go to paywalls of various kinds. (Although that also reopens the question of how findable and linkable their own local content is for the aggregating algorithms of Outside.in and others.) If it does get it righter, it could also become a more likely potential partner for media companies looking to cut their own local costs and reach audience. It’s all in getting that cost of content unit/ad yield per unit of content right, and no one’s yet minted the winning formula.

We can see the dilemma in one current market. Journal Register CEO John Paton (who talks about competing with Patch, here) has been working with Outside.in, to supply aggregated content for the planned fyi.Philadelphia site. He put that relationship on hold this week, and delayed the product launch, as he conjures the question: Is the new Patch/Outside.in a friend, a foe, or some in-between still to be figured out?

POSTED     March 10, 2011, 10 a.m.
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