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hyperlocal

The newsonomics of hyperlocal’s next round: Patch, Digital First, and more

The search for a scalable, money-making model for hyperlocal journalism continues, but there are some reasons for optimism.
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It’s easy to get cynical about hyperlocal news on the web. People have been working to figure out a scalable model to support it for years. But news-model fatigue shouldn’t be mistaken for permanent failure — it’s just that no one has yet found success.

Community journalism pioneer Steve Buttry, now heading up community engagement at Digital First Media, says he is buoyed by disruptive-change theorist Clayton Christensen’s notion that 90 percent of successful startups start out with the wrong strategy and often take three or four attempts to get it right. That makes some kind of web sense. For those of us trained in the arts of journalism, though, it’s probably a tough lesson: We’re trained to get it right the first time.

With that in mind, let’s look into the next round of hyperlocal, the emerging newsonomics around Patch’s aim to become profitable, just as Digital First Media (DFM) dials up its own hyperlocal strategies. Though many newspaper companies are testing hyperlocal strategies, individually or through their chains, Patch and DFM stand out for the scale of their intent. We’ll stick with the term “hyperlocal,” even though it’s a squishy one, because it still best describing the kinds of close-to-where-we-live school news, local sports, police reports, and government coverage we find useful. It may a community of 20,000 or 80,000, but for many of us, it’s less than a whole city.

Let’s start with Patch. Each quarter, as AOL announces its financial results, CEO Tim Armstrong sticks his head in the boxing ring, and lets it get punched around a bit. He took over a newly independent Time Warner spinoff and has been madly transitioning it beyond its sinecure of the old-timey Internet access business.

I won’t debate here his hits and misses, his romancing of Arianna (or was it the other way around?), or the half-life of AOL, given its trajectory and the fact it has lost more than $800 million since its 2009 spinoff.

For the news business, two facts stand out. First, Patch is doing journalism, employing more than 1,000 journalists. Second, it is testing a model that needs testing, however Patch’s history is eventually written.

That model may be getting a rocket boost of revenue, if January’s trends hold up. In an interview last week, Patch President Warren Webster says that January booked ad revenue alone equaled half of all of 2011 ad revenue. If that trend were to continue, we’d be looking quite differently at Patch’s chances of making it into the black before AOL’s investor patience runs out. Just last week, Starboard, an “activist fund,” increased its AOL stake to 5.1 percent, pushing for strategic changes, and Patch is in the middle of its sights.

[Update, 2:52 p.m.: Some added context to the Patch ad revenue increase: The January ad revenue noted above should be noted as bookings for the year as a whole, committed by January. Further, Patch says that, as of today, it now has commitments for more than 75 percent of the total revenue that it recognized in 2011. Those are ads that it has sold and that will run some time in 2012. It recognizes the revenue, like almost all ad sales companies, when ads run. Indeed, January 2012 is up manyfold over January 2011, but in terms of the yearly revenue contribution, it will be relatively small given that January is a light ad month throughout the industry. While it's impossible to extrapolate whole year 2012 revenue, based on the data so far, the sharp turn up in trajectory portends a major boost in ad revenue in 2012 — how large and how sustainable, still to be seen.]

That model may be getting a rocket boost of revenue, if January’s trends hold up. In an interview last week, Patch President Warren Webster says that January ad revenue alone equaled half of all of 2011 ad revenue. If that trend were to continue, we’d be looking quite differently at Patch’s chances of making it into the black before AOL’s investor patience runs out. Just last week, Starboard, an “activist fund,” increased its AOL stake to 5.1 percent, pushing for strategic changes, and Patch is in the middle of its sights.

AOL won’t release specific Patch financials, but we can piece together numbers — Patch CSI — that tell us the story so far. AOL has said publicly that one quarter of its 864 sites are making $2,000 a month or more of revenue. That would also mean that 645 or so of its sites are making less than $2,000 a month in revenue.

On revenue, let’s be generous and say that one-quarter of the Patch sites are making an average of $2,500 per month. That would mean $30,000 a year. So 215 (or one-quarter of the sites) at $30,000 kicks up to $6.45 million annually.

Let’s say that on average the other three quarters of sites are earning an average of $1,500 a month, or $18,000 a year. Multiply that by 645 and we get $11.6 million.

So annual 2011 revenue would come in at about $18 million. That matches up with other extrapolations, guesses, and the like, which put the number around $20 million.

We know that AOL is spending $160 million a year on Patch. So on an operating basis for 2011, total revenue of $18 million would leave Patch with a $144 million operating loss.

But wait. If January was that good, equaling half of the 2011 revenue rate, that would mean Patch took in $9 million in that month. If it could sustain that number all year, it would be up to $108 million in revenue. Yes, its sales cost would increase, so let’s add in another $20 million for those. If all the other costs were constant, 2012 costs would be $180 million. 2012′s revenues would be $108 million.

You could look at that number two ways:

— It would still be losing $82 million a year;

— It would have erased 43 percent of its operating loss in a year.

A Patch half-green, or a Patch half-brown.

On the green end is Patch’s maturing approach to ad sales. For instance, Webster is enthusiastic about its recent initiative to add a third leg of revenue, in addition to national impression-based advertising and largely sponsorship-based local advertising.That third leg is better monetizing of its directories. “In the last two months, we pushed our sales team to push claims.” “Claiming” is getting local merchants to verify their free business listings. Of course, the next step is to get them to advertise and to enhance those lists. “We hit an all-time high recently,” he says. “We got 400 claims in a single day across Patch.” Patch says its claimed-listings rate is up roughly 124 percent over the past six weeks.

The big potential payoff here: Claiming is lead generation, and Patch has found claiming merchants to be 4 to 5 times more likely to advertise once they claim. These enhanced directories offer video profiles, highlighted listings and “owner messages.”

Journalistically, what does Patch have to do to win a race towards profitability, a marathon that will probably last at least three more years? Fundamentally, it needs to fulfill its promise: “Hi there, we’re Patch, your source for local knowledge you can’t live without,” a promise it curiously makes on its overall entry page, but not on its town sites.

If I were giving out grades, I’d give many sites As and Bs for vitality and enthusiasm — and those are good starters in journalism. The better sites do give us a sense of townness, a tribute to the reporters running ragged around their geographies, snapping photos, doing quick interviews, promoting Patch, and more.

In news, they’re in and out — no real competition to good daily newspapers, even with their diminished staffs. They’ll hit on good stories here and then, but can’t be depended upon to do it. I thought that the March 2011 acquisition of Outside.In would lead quickly to better news aggregation from other local news producers — creating a better local news briefing — but so far I see scanty evidence of that.

Blog posts are increasingly numerous — Patch is up to 14,000 active bloggers, Webster says, or 16 per site on average. But they run a wide gamut in quality and readability.

In utility, Patches are hit and miss. Lots of local events can be found — to the gratitude of civic-minded organizers of them — but the presentation isn’t the most user-friendly.

As sources of finding a good new restaurant or a handyman or the best child care in my neighborhood, they fail. The city guide vacuum (“The newsonomics of the Swift Street Courtyard“) — still left in place after the Sidewalks, Digital Cities, Real Cities, and more have come and gone — is a market opening for Patch. Yet its directories are utterly generic, not distinguishing an above-average eatery and Jack in the Box (“Whether you’re looking for a quick bite for breakfast, lunch or dinner, or a late-night snack, this Jack in the Box, conveniently located on Ocean Street near Water Street, is ready to serve you 24/7. You’ll find favorites such as cheeseburgers, Sourdough Steak Melts, Chicken Fajita Pitas, shakes and fries, as well as specialties that include a chicken teriyaki bowl, deli trio grilled sandwich and grilled breakfast sandwiches. Salads, tacos and a kids’ menu are also available.”)

That may explain the recent hiring of Rachel Fishman Feddersen, late of Bonnier’s Parenting.com, and an early city-guide staffer, way back in 1995 for New York City’s Metrobeat, which was later bought by CitySearch. A feature pro and a mom in Montclair (once the hyperlocal capital of the country, when Patch, Baristanet, and NYT’s The Local competed there, and now still deeply competitive even after the Times pulled out), she’s into her second week on the job. She told me that her job as chief content officer will range from “the unsexy stuff” — things like page load times, better SEO, newsletter-sending time — to showcasing Patch best practices to coming up with winning editorial features.

Patch is also experimenting with new more visually interesting designs in a couple of dozen markets. Webster acknowledges that the directories in particular and other parts of the site “are not yet built out.”

What else might AOL and Patch do to close the profit gap faster? It could grow its audience more quickly by better connecting Patch to other relevant parts of AOL. Huffington Post, for example, doesn’t automatically recognize local visitors and give them easy access to a local Patch site. Find the “Local” tab, and you can choose one of HuffPo’s city sites — but there’s no Patch content to be seen. That seems like a no-brainer. Further, a dedicated tablet app (rather than the 2x smartphone product) seems like it should be in place by now.

“Everyone wants us to fast-forward to the end of the movie,” Webster notes. He has a sensible point. Given how each Patch rumor — two sites consolidated here, freelance budgets cut back there — is treated as forensic evidence, Webster is in relatively hardy form. He admits that Patch, with its fast expansion, took too much of a one-size-fits-all approach to site deployment, and was too “cookie cutter.” Some of the changes in budgeting — for instance, devoting some site budgets more to marketing awareness and less to paying stringers — derive from overall understandings of the market; others attempt to learn that needs in West Des Moines are different than in West Orange.

That’s only fair, I think. Whether the moves have been right or not, it makes sense to tweak this hyperlocal business and journalism model, and each change shouldn’t be a cause for suspicion. Let’s remember that at the same time Patch may be cutting out freelance dollars here and there, daily newspapers are continuing to remove dozens of full-time jobs.

Further, as Buttry points, it takes time to get things right — though it’s not clear how much time Patch has, given growing competition.

Advertising competition is ubiquitous, with Google, Facebook, and Yahoo all taking new runs at local treasure. Buttry’s Digital First is making moves of its own. The company, which is making itself famous for developing dozens of new local, digital advertising products, is now in a couple of big Patch territories, particularly Connecticut and California, as Digital First digs deeper into MediaNews management in both Northern and Southern California.

People increasingly will compare Patch and Digital First. Says Buttry: “We get a lot of attention because of the geographic overlap, and we have big ownership [Alden Global Capital, in Digital First's case]. But we are transforming whole newsrooms, not setting up one-person shops.” Digital First’s Connecticut Group Editor Matt DeRienzo outlines the coming competition even more directly, pointing to the strengths of his Connecticut test lab in Torrington, a model soon to spread to Oakland and New Haven, with numerous variations elsewhere. He makes three points — ones that all legacy newspaper companies would have to use against insurgents like Patch:

  • “A larger staff, and a newsroom structure with reporters who have editors on site leading and counseling them;
  • 134 years of history covering the community (and in Torrington, we opened our entire archives for free access to the public, one of the most popular features of the newsroom café);
  • A physical gathering place that is built more like a community center than a newsroom (free public meeting space for the Garden Club, Little League board of directors, Young Republicans, etc., classes and workshops for the public, open story meetings, etc.).”

And yet: Digital First, at this reading, has about 1,000 bloggers within its cities, compared to Patch’s 14,000.

Then there’s the overlap question: Aren’t these guys doing the same thing? Well, sorta, kinda. Buttry even says Digital First could reach out to Patch, offering a partnership or aggregation arrangement of some kind, though he hasn’t done that yet. “We should include them in our local networks.”

So it’s not David vs. Goliath, nor David vs. David, nor Goliath vs. Goliath. In fact, these may be two Davids both fighting against the Goliaths of Facebook and Google, which are rapidly gaining digital ad market share on everybody. It’s just another front in the digital wars, one perilously close to our homes.

                                   
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  • Social Media Maven

    Sorry to burst your bubble but the revenue number Tim quoted was for the 2012 year. In other words he is saying that we have contracts on the books as of Jan 1 the sum total of which is equal to all of 2011 run revenue. 

    To put it differently our commitments for 2012 currently = revenue run in 2011. This is a far, far, far cry from hitting the number in one month. As such the rest of your blog is irrelevant.

  • Anonymous

    Ken, please comment on the above, uh, comment.

  • http://www.niemanlab.org/ Joshua Benton

    FYI, here are the relevant portions of AOL’s 4Q investor call (Feb. 1):

    http://seekingalpha.com/article/333882-aol-s-ceo-discusses-q4-2011-results-earnings-call-transcript

    http://seekingalpha.com/article/333882-aol-s-ceo-discusses-q4-2011-results-earnings-call-transcript?part=qanda

    Tim Armstrong: “To-date in 2012, we have already sold 50% of the total revenue we did in 2011. So, we’re off to a very fast start on Patch sales for 2012.”

    Analyst in the Q&A: “You had mentioned I think about 50% of 2011 ad revenues already booked for 2012. Am I right in thinking given the difference in buying lead times between guaranteed O&O network and a large chunk of that is guaranteed O&O?”

    Artie Minson, CFO: “Just to point out that comment related to specifically Patch and that specific comment was what we did last year in 2011 revenue for Patch, we have 50% of that on the books today. It hasn’t necessarily run, it just on the books to be run for the going 2012.”

  • Perry Gaskill

    Sorry if this might be redundant; the Seeking Alpha links didn’t work:

    For the sake of accuracy in this post, Tim Armstrong was reported to have said during Aol’s last earnings call that of the 863 Patch sites, some 401 now have revenue of more than $2,000 per month. It’s also probably fair to say that Armstrong’s comment is somewhat disingenuous in the sense that, according to most estimates, each Patch site needs to generate around $14,000 per month to break even.

    What’s also somewhat misleading is the fact although the Patch sites in total may generate 10 million unique visitors each month, an average of around 15,000 per site, what Aol is not reporting are page view counts to give an idea of reader engagement. According to leaked documents published last June by Nicholas Carlson at Business Insider, visitor traffic for the 70 or so Patch sites in Southern California amounted on average to less than two visits each month per unique visitor, and less than two page views on average for each of those visits.

    There are those who have made a plausible argument that, based on the numbers, Patch is pretty much doomed. But whether that’s true or not is almost beside the point. If there’s a lesson to be learned from the Patch experiment, it seems to me that it’s probably this: Is it realistic to expect a broken business model to somehow fix itself by the application of scale, or do you need to have an already workable model in place before it can grow larger? It would also be a mistake to assume that if Patch ultimately fails, that all local online is going to fail.

  • Social Media Maven

    Just one further note. The contracts are nonbonding. Someone could have signed up at $1k/month and cancel after 2 months. The real proof will be YOY revenue growth from Q1 2011 to Q1 2012.

  • Reykjavik

    Making money off local solely from an online perspective it going to be difficult. The traffic volumes to any one piece of content are so low, the players need to compensate by developing better advertising products that have better monetization potential. Which they haven’t done so well. Patch tries to flat rate its sponsorships and ads, but when you boil that down to a CPM (or equate to an AdWords CPC), the delivery is absurdly low for the price. Digital First has feet on the street in those local markets, but local publishers traditionally have been very unsavvy about such things. Perhaps their centralization strategy will help, but I have found DFM to be all hat and few cattle — Paton touts results but I betcha if an independent third party walked around the organization, it would only be marginally better than the old JRC days. And now he’s picking up a portfolio of larger papers that have different economic dynamics. I would say the jury’s still out on this one.

  • benito

    “First, Patch is doing journalism, employing more than 1,000 journalists.”

    That’s not accurate.  AOL (which has abhorrent business history) is aware of the gold mine which is the SMB advertising market.  Patch is their effort to tap it.. a bit of a hail mary for a suffering, bloated beached whale of a company.  By utilyzing a hyperlocal slant and employing out of work journalists, journalism just happens to be a byproduct that manifests sporadically. 

    Google the turnover rate of staff and the non-renewal rate of advertisers.  AOL is bringing large-scale business philosophy to hyperlocal “content” and what people fail to understand is that many readers and businesses are smarter than AOL, or Nieman analysts would like to believe… and they can smell a rat.  More and more people know that Patch = AOL… and not a “community” resource.

    ReachLocal and Yelp are in the same boat… did they have good IPOs, yes… but if you study up on these companies they care shit about local businesses and that’s getting around fast.  There just happens to be huge numbers of SMB’s so the turnover rate means little to them at this point… but it will catch up to them. 

    BTW, this article reads like a more eloquent Tech Crunch advertorial.

  • http://www.facebook.com/martin.langeveld Martin Langeveld

    There ought to be room for companies like AOL to make investments that take 3-5 years to turn profitable without stockholders breathing down their neck every single quarter.  Amazon began operations in Q3 1995, and didn’t turn its first profit until Q4 2001, so over 6 years to profitability. Facebook took 5 years to turn a profit. Google took 3 years, but Google lost money on its YouTube acquisition for 5 years. Should Google have shut YouTube down?
    For practical purposes, Patch wasn’t kicked into gear until early 2010 when AOL launched the big $50 million expansion. So it’s at 2 years. Give them a couple more years at least.

    (Full disclosure, my son is a Patch editor, but I get no inside scoops from him.)

  • Laguna Beach Patch Fan

     $14,000 per month to run a Patch site? No way it’s that high. That would be $168,000 per year. Maybe that’s what it cost at first, but my sense is things are far more efficient now.

    The annual costs, as I see them are:
    Local editor salary: $35-55k, depending on experience of person.
    Share of ad sales manager: $10-15k. (sales managers serve 4-5 sites.)
    Share of regional and associate regional editor salaries: $10k per site.
    Freelancers: $5,000 (this figure was drastically cut. Patch hardly uses freelancers anymore)
    Other expense (gas, equipment, etc.): $5,000.

    So, even on the high side you’re looking at half of the number you cite.

  • Laguna Beach Patch Fan

     Martin – that’s a really good point. Think of how many ventures would be successful if investors would simply give them time to mature. Just because something isn’t profitable in a year or two doesn’t mean it can’t be successful eventually. I’m not saying shareholders should simply wait forever, but you’ve got to give a venture of this size a couple years, at least.

  • Kdoctor

    Mark: Yes, it needed clarification, which we put after 7th paragraph. It is true that it is a bookings number. Now, though, Patch says it has booked ads for the year that equal 75% of its whole 2011 revenue. Given 10 more months, a recovering economy and a more focused ad sales effort, the annual growth should be a 2-3X 2011. If that happens, yes, Patch will still show a big loss, but if Armstrong can right the rest of the AOL ship, we could see how Patch could get to profit by 2014-2015. 

  • Anonymous

    Nice to see someone not all-out trashing Patch, including Buttry who even mentions working together. That’s nice to read about a company I like and news sites that I read often and find valuable to my community. 

  • http://twitter.com/howardowens Howard Owens

    Ken, $2,500 a month from a single market is hardly impressive and not a “rocket boost of revenue.”  A rocket boost would be going from $0 to $4,500 per month in three months, as The Batavian did.

    And compare that $2,500 to what the typical successful indie publisher does, which is excess of $10K per month. 

    If Patch were any where close to work as a revenue model, those are the kind of numbers and growth you would see.

    And, btw, $120K annual revenue (which is the low end of a successful indie), is $103.7 million, still below Patch’s operating expenses.

    Indies have shown how to get to this level and a bit more of revenue; the question isn’t how to get there (and it’s reasonable to doubt that Patch ever will). The question is now to get to the next tier.  That’s what we’re working on now.

  • http://cas127.myopenid.com/ cas127

    Well (for one) you are leaving out benefit costs, right?

    If true, add another 33% to the salaries – taking you up to 100k per year per site.  

    Plus I think you are badly low-balling likely CA salaries and also underestimating corporate overhead.  

    I’m not saying such things are justified or immutable – just that they likely contribute to the 175k to 200k in required annual breakeven per Patch.

    Also, I think Patch’s original operating assumptions have been rather massively f*cked up.  

    Reports (I’m pretty sure they are directly from AOL) indicate that AOL believed that if they only captured a “mere” 1% of the estimated $20 million per year in ad spend per Patch locale, they could make money on $200k per year in individual Patch site revenue.

    The only problem?  While 850+ Patches *nationwide* might exist that have a minimum $20 million per year in total local ad spend, *Patch isn’t nationwide.*

    For reasons that are completely unclear, those 850+ Patches are crammed into about 20 states.

    I don’t think there are 850 locales within just 20 some states that have a minimum annual total local ad spend of $20 million.

    If I’m right, then Patch’s most fundamental business case assumptions and operational decision-making choices are wrong.

    Can anybody confirm that Patch is putting sites into (hundreds) of locales that don’t even meet its most fundamental market criteria ($20 million minimum in local total ad spend)?

  • Jonathan Zacharias

    Some of the sharp rises (like o to 4500 a month) would result in a sharp fall in my opinion when it comes to merchant capital

  • Roy

    This is very good news from you so that we know everything about hyperlocal news on the web where people have been working to figure out a scalable model to support it for years. From here we know that the news-model fatigue should not be mistaken for a permanent failure but it’s just no one has yet found success. I appreciate you to share this good news for us.

    Thanks a lot,

    Roy