The Patch Saga, and Its Implications for Local Media

patch_truckAol’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.

  1. January 17, 2014

    Josh Fenton makes an excellent excellent point.

    To restate it from my end using a kitchen analogy: Not only did Patch bake 800 cookies rather than one, single cake. They then discovered that they had no serving plates.

  2. Paul Plant
    January 17, 2014

    An excellent article, summed up perfectly in the final two paragraphs. Strategy is one thing, but execution of it is everything!

  3. West Seattle Blog
    January 18, 2014

    I’ll spare you a long rant but the contention that neighborhood information is an “infrequent” reading interest is wrong.

    1. January 18, 2014

      I agree.
      I visit my neighborhood site at least once a day.
      I visit Yelp at least once a day.

    2. Both Ways
      January 20, 2014

      I don’t disagree with you but you may be in the minority. I barely ever read the news about my suburban town before I moved to the city because I didn’t own a home and didn’t have children – the only things I cared about were major crimes, scandals and possibly severe weather/road closures.

      I contend that for some people, local content is a frequent visit, but for others it is indeed infrequent.

    3. BruceTheBlog
      January 21, 2014

      You also spare us a scintilla of evidence to back up your glib, flat-out “wrong.”

  4. TheNate
    January 18, 2014

    Sad, really. The need for hyperlocal news is there, but AOL totally botched it by overworking editors with local crap and constant tech changes. I know my local Patch sites went from interesting reads to crappy local blogs with little local interest way too fast.

  5. Mike Donatello
    January 20, 2014

    Local media “matter.” Nuff said.

  6. DB
    January 20, 2014

    What local publishers need is not a national network — nearly all national editorial content is of no use to a local publisher. What they need is access to some national advertising dollars through an affiliation program that delivers real dollars. Local sites will continue to do the best job of covering local news and selling local advertising. Real viability for this industry will come when someone laces together these sites in a network to deliver value to national advertisers. Patch never understood that the connection needed to be less formal and forced, and more loose and voluntary.

    1. Scott Brodbeck
      January 20, 2014

      I couldn’t disagree more. The only way the economics for local sites makes sense is selling local advertising. There’s nearly perfect competition for national online display dollars right now. Where there is a market opportunity is local and regional advertising, which is very hard to crack — one of the reasons Patch had trouble — but much more lucrative once you do.
      How many local weeklies do you see carrying ads from Pepsi and Chevy? Not many. But you do see ads for grocers and car dealers.
      This Tech/Journalism Pundit wet dream that boots-on-the-ground local content will be made possible by national advertising is simply not going to happen. Feel free to lem right off the cliff trying. Local is hard and it doesn’t scale, at least not nationally — there are no shortcuts to making it work.

  7. January 20, 2014

    Authentically local online news works in the small-business model. It doesn’t work in the large-scale cookie-cutter model rolled out by AOL. “Analysts” who regard community news as “pieces of content” and “hyperlocal” as just another way to make money on the internet are making wrong-headed assumptions, as Patch proved. Community news won’t support top-heavy corporate structures and shareholders of publicly traded companies — a truth that predated digital media.

    Doctor cannot be more wrong when he says “Hyperlocal is simply too small of a market area and too infrequent a reading interest to create enough engagement with an audience.” It’s just that the small community news website’s audience is too small to “count” for people like Doctor.

    As a successful independent online community news publisher, and a member of the board of directors of Local Independent Online News Publishers, representing more than 100 publishers like me, I know that the failure of Patch — like that of other grandiose ersatz local networks that went before it — does not in any way speak to the viability of the business model that truly works for online local news. It’s a mistake to draw that conclusion.

    Denise Civiletti, publisher

  8. DFM WTF
    January 21, 2014

    Whether or not there exists a holy grail for hyper-local, or whether Patch’s failure has industry-wide meaning, Mr Jacobs lessens his article by soliciting the opinion of Mr. Brady. DFM, despite its name, has lent nothing to the hyper-local digital discussion and has, itself, filed for bankruptcy. Impressive. Mr. Brady has accomplished little of journalistic merit outside of accumulating airline miles and being a journalism poser. Of course, he works for the industry’s biggest poser.

  9. Larry
    November 17, 2016

    My humble opinion of is they lack journalism ethics and integrity. Patch is back, but it is destined to fail again. Patch has been the recipient of numerous complaints at the Better Business Bureau and maintains an F rating by the consumer protection organization. In late 2016, Patch and Hale Global were sued for unlawfully accessing and publishing information from internal police documents, publishing false and libelous statements, provoking hatred, religious discrimination, anti-Semitism, carelessly endangering alleged witnesses, and revealing alleged witness names. For more information on this, please see case Jonathan Reich v. Charles C. Hale, Hale Global, Patch Media et al. Index number 156787/2016 at New York County Supreme Court.

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