The Patch Saga, and Its Implications for Local Media

Aol’s decision to unload its struggling hyperlocal network Patch earlier this week may not have been unexpected, but the distressed property’s fire sale does carry with it some broader implications, even as many local media companies have recently started to see signs of reinvestment. After two years of proxy wars, PR debacles, and big losses, the network’s legacy is at once a story about the perils of creating expensive digital content for markets that may not support it, the troubles of scaling a local digital media business, and the ambition of a major technology executive who thought he had the solution to some of the major issues in local media’s transition to digital.

The beginning of the end came for Patch in May 2012, when Aol chief executive (and Patch founder) Tim Armstrong promised investors that the hyperlocal network would reach run-rate profitability or find a partner to share the costs by the end of 2013. The move came amid a vicious proxy fight, in which a Starboard Value LP, an activist investor in Aol, targeted Patch as example of the board’s mismanagement, publishing a scathing 150-slide presentation, which included shocking projections of Patch losses.

From the outside, the 19 months since then have appeared to be a race to the finish. The company cleaned house, and then cleaned house again; and then, brought on fixer Bud Rosenthal, the head of Aol’s embattled membership group, to trim costs and position the division for a soft(ish) landing. That happened on Wednesday, when Aol announced that Hale Global, an investment company that specializes in troubled technology companies, would take over the division.

The question of scale
Aol’s relationship with Patch may be more or less finished, but the saga leaves a lingering question for the media industry: were Patch’s struggles an isolated episode, the result of a flawed business model and a leader who rushed to scale the company nationally before perfecting the formula? Or, does the project’s failure, with all of its massive funding, represent a fundamental misapprehension of the market opportunity for local media in the digital age? Was it that the team at Patch was unable to find that holy grail — or does the holy grail simply not exist in the way that Armstrong and others believed?

Whether or not it’s directly the result of Patch’s mishaps, there has been a distinct sea change within the industry. More and more, there’s a sentiment among industry observers that the content economics of hyperlocal media do not scale — at least the way that Patch tried to build it. Ken Doctor, an author and media analyst who runs the site Newsonomics, believes that while Patch found itself on the wrong side of today’s media equation, there is a combination of ingredients that could work.

“Hyperlocal is simply too small of a market area and too infrequent a reading interest to create enough engagement with an audience,” he told me in an email. “The start-ups that are proving out a model are city-wide, having a chance to build scale.”

What’s left is a schism in the market. On the one hand, a number of independent publishers have built small-but-profitable businesses at the community level, and aren’t really looking to create massive scale. Meanwhile, a handful of larger projects have expanded from the wealthy suburban towns that Patch targeted into larger regional areas, including cities.

The other criticism of Patch is that the company never appeared to justify to investors why 800+ sites under one roof had a competitive advantage over 800+ independent and autonomous projects. As Doctor points out: “AOL never adequately figured out how to efficiently sell national and local, or direct traffic well within and from its wider AOL network.”

I asked Josh Fenton, the founder of GoLocal24, one of the few local content plays that has seen some success recently, whether he thought Patch’s failure indicated a more systemic inability for local content to scale, and he disagreed: “[Patch] didn’t scale model, they built 800 Patches — they repeated it.” Fenton remains adamant that scale can provide a local media play with a competitive advantage in both content production and revenue generation and that Patch just failed to achieve it.

Jim Brady, editor-in-chief at Digital First Media, also thinks the problem is Patch-specific: “I think we make a mistake in the industry when we see a failed project and use it as some kind of bellwether for the broader content. I don’t think Patch’s failure necessarily portends anything about the overall content economy. It was tough before Patch; it’ll remain tough after Patch.”

The market opportunity: fact or fiction?
The more pressing question for Fenton, and others who have made bets on local media, is whether the market opportunity for local content really exists on the level that executives like Armstrong believed. Fenton argues that the growth of mobile paired with the continued decline of the newspaper industry has left a massive gap in the market to the tune of $50-100 billion.

However, this estimate assumes that content-related advertising can eventually account for a similar portion of local marketing budgets in digital as it had traditionally in print. Some industry data suggests otherwise. According to a December 2013 study by Borrell Associates of 903 small business owners, merchants said they expected to spend only 12% of their 2013 digital advertising budgets on banner advertising, sponsorships, and classifieds — the products most commonly used to monetize a media company’s audience.

In many ways, content companies are fighting a much deeper tidal change in consumer behavior, one that extends well beyond the medium through which content is delivered. In a local market where local information is ubiquitous and constantly available through mobile devices, the consumer’s path to purchase changes dramatically. Consumers can access a limitless amount of information from anywhere, making “awareness” more and more obsolete as a marketing strategy. Meanwhile, brands and local businesses can target engaged consumers by location through a wide array of advertising tools (from Facebook to geofences) that don’t require local journalism — some of which are proving a more effective way to generate consumer demand.

Local media matters; and the demand for quality local journalism absolutely exists. But until digital media figures out its role in the modern consumer’s journey to purchase local goods, many local content companies will struggle to generate the kind of reliable profits that once made local media a darling of Wall Street — and a friend to Main Street.

Steven Jacobs is Street Fight’s deputy editor.