If you sell lemonade for $1 and it costs $800 to make it, that’s not a great business.

Robert Peck, managing partner at Quasar Capital Advisors, a consultant to Internet and technology companies, speaking to the Wall Street Journal.

The Wall Street Journal reports that AOL is spending approximately $160 million a year on Patch, its hyperlocal news network.

Unfortunately, Patch’s revenue model is an ad-play and people just aren’t visiting these local sites in large enough numbers to make them attractive to advertisers. Ever hopeful, Tim Armstrong, AOL’s CEO, says the Patch network will eventually be profitable.

Via the WSJ: “AOL is spending about $160 million a year on Patch, which equates to about $150,000 to run each individual Patch site annually, according to an analyst’s estimate. AOL first focused on building traffic to Patch sites, and just recently started ramping up ad sales. Mr. Armstrong said in a call with investors last week that while revenues for Patch sites are small, they are growing quickly and on track to be profitable over time.”

The larger issue is that after spending $315 million on the Huffington Post and over $90 million to buy Techcrunch, 5min Media and Thing Labs in order to transform itself into a content company, overall traffic growth across AOL properties is declining.

Wall Street Journal, AOL Growth Comes at a Cost: After Acquisition Binge, Internet Company Faces Fierce Competition for Ad Dollars.

(reblogged from futurejournalismproject)