Patch, AOL's hyperlocal news project, is undergoing steep layoffs as it aims for profitability by the end of the year. Leaked memos detail Patch's revenue both in its lower reaches, and what its sales bosses expect it to accumulate daily. This grants us a window into Patch's health, and why the project is cutting as deeply as it is.
The core result of analyzing its financial health is that if we presume the upper end of rumored cuts to staff, fair cost per employee estimates, and reasonable top line sums based on what has leaked from AOL, Patch has a shot at reaching the black before the end of calendar 2013.
The memos, obtained by Jim Romenesko, outline several important metrics: How much money Patch has brought in recently and how much money it wants to bring in daily. With these two figures, we can do some number work and parse out the ranges of Patch revenue. We can then contrast those figures with reasonable estimates of Patch's cost structure, given that we have a recent employee number, also via the leaked memos.
If you don't care about the monetization of media and the future of news, prepare to be fantastically bored. (Standard disclosure: AOL owns TechCrunch.)
Here's our first key bit of memo, written by Jim Lipuma, head of U.S. ad sales for Patch on Tuesday: "Over the last 5 sales days, we have amassed our worst results of the year." Let's fit that with what Lipuma said on Friday: "We had $36K day yesterday, when we need to be having $100K+ days. I understand why yesterday happened, but we cannot settle for days like this going forward."
So, the $36,000 day was part of the worst period of ad sales of the entire year. The $100,000 figure is interesting, as it sets high-end expectations for what Patch should earn on any given day. So, we have upper and lower bands on what Patch should and should not earn day to day.
We need another data point, however, which Lipuma happily provides in his memo: "This is the time to drive the ball and swing big. Do it for yourself, your families and the 1,200 people who call themselves 'Patchers.'" Now we can dig into the math.
There are two main ways for us to estimate Patch's revenue: By discounting weekends, and by not. If we discount weekends, we assume a five-day sales week, in which incomes are derived Monday through Friday and in no meaningful capacity on Saturday and Sunday. However, given the scope and scale of both AOL and Patch, this might be too conservative, so we will also run estimates of revenue for Patch that treat weekends as normal sales days. The functional truth will likely land in between. However, as noted, we are looking for a revenue range for Patch to help us better understand its financial health, not detail its every vein and dollar.
Let's start low. Lipuma noted that the preceding five-day period was the worst sales period of the year. It included the aforementioned $36,000 day, a figure bad enough that it acquired internally public scorn. Let's be generous and assume that the $36,000, one-day sales figure was on the low end of that five-day period, giving us an average of, by our own choosing, $45,000 per day during the period.
$45,000 per day for a five-day period is a total of $225,000 in revenue. Counting weekends as normal days, there are 73 five-day periods in the year, and if we do treat weekends as non-working days, then there are 52. Thus, at the $45,000 per-day figure, Patch generates between $11.7 million and $16.4 million in yearly revenue.
Now, Patch wants to earn more than $100,000 per day in sold ads. That's more than twice our lower-band estimate. Let's skew that figure a touch higher for sport, and assume a $110,000 per day ad-revenue figure for Patch. Again, taking weekends into account and not, Patch would generate between $28.6 million and $40.15 million in yearly revenue.
A number in between is perhaps more interesting. Assuming $75,000 in ad revenue per diem, Patch would, discounting for weekends and not, generate yearly top line between $19.5 million and $27.4 million.
AOL had hoped that Patch would earn between $40 million and $50 million in 2012. The margin of that miss wasn't disclosed.
The above calculations assume on Patch's ad revenue. Patch sites sometimes also include links to CareerBuilder and so forth. However, I think it's safe to estimate that the lion's share of Patch income is from advertisements. So we could extend the above numbers north 10 percent or 20 percent if we wanted to just to be safe, but I don't think that it is necessary. A caveat: AOL has spoken heavily on the topic of partnering Patch sites with outside parties. This could generate material revenue. However, we have no way to estimate those incomes.
And, as always, let's state that some Patch sites do in fact make money and do well. The issue at hand is the larger sickness of the Patch project, which is about to undergo another leeching to reduce its size.
Now, to the other side of this equation: costs. Lipuma mentioned 1,200 Patch employees. The old metric of each employee costing $100,000 per year in salary, benefits, and office space cannot apply here. If it did, Patch would have personnel costs of $120 million before any other expenses. That level of outlay would not only sink Patch overnight, it would tear down the entire Brand Group at AOL.
That leaves us, again, to scratch our heads and ask what might be reasonable. Happily, we have some outside data to guide us. Salaries for Patch editors and lower ad sales reported on Glassdoor appear to land in the $35,000 to $45,000 per year range. Given that, let's assume $50,000 per employee per year in expenses, once their total cost of employment has been considered. Don't forget: We are being slightly generous with revenue and parsimonious with cost. In the realm of broad inference, it's nice to be polite to your subject.
At the $50,000 figure, Patch remains in the soup, as it has costs of $60 million per year for its employees, assuming that it is keeping the full 1,200. We'll, it's not. So, assuming the full 550 rumored layoffs are undertaken, Patch will be left with 650 employees. At $50,000 per, that's $32.5 million in personnel costs. We have revenue estimates up top that make that number quite feasible. So, if AOL does cut as deeply as expected, it is possible that Patch could turn a profit
Naturally, the above figure explains the layoffs: There is no way to ramp Patch revenue — which is now currently in a trough — quickly enough to reach profitability with its current cost structure by the end of the year, as AOL CEO Tim Armstrong promised. So, layoffs.
To make all this a bit simpler: Assuming full layoffs, $75,000 per day in average sales not discounting for weekends, and strong 'other' income that AOL has repeatedly mentioned as possible, Patch could make financial sense.
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The next piece to this is that by cutting editorial staff, Patch will likely trim its pageviews and, thus, at least in theory, its advertising inventory. In the medium term, that could limit revenue growth at the group.
And the value of a network of hyper-local websites diminishes as its reach retreats. The idyll of hyper-local news content and community becomes less polished if only select markets can support such an enterprise. AOL intends on shuttering 400 Patch sites as part of the layoffs.
There is another thing to mention, which is the tone of the more recent Lipuma memo that has almost the taste of threat: "Time is an asset that we cannot waste. Make it an awesome Tuesday and get on pace this week. You will be thankful that you did, come Monday."
I wouldn't think that can help morale. The bottom line: At $36,000 per day, the recent poor tally, Patch doesn't function. At more than $100,000 per day, things appear doable. At $75,000 daily, I can see them breaking even by the end of the year.
The kicker to the above is that Patch can make it, if not at the scale that Armstrong had in mind at the start for the project. Whether that is to be commended, given the painful expense of the larger experiment I leave to you to decide.
Top Image Credit: Anna Hanks
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