Patch’s New Look Still Leaves It Inferior To Competitors

AOL’s (NYSE:AOL) social platform Patch, released a new design Sunday night in an effort to increase user engagement on the platform. The redesign was only available on five sites but will be rolled out to all of Patch’s local sites by the end of Q1 2013. We think that while this is a step in the right direction as Patch is still too weak to be AOL’s core social offering. In our opinion, AOL must invest some of the cash that it has on hand into creating a platform which engages users on a much deeper level, otherwise it risks losing users to competing sites such as Facebook (NASDAQ:FB), Google (NASDAQ:GOOG) and Yahoo! (NASDAQ:YHOO).See our complete analysis of AOL here

Why is Social Important for AOL?

According to our estimates, AOL currently derives 22% of its value from display advertising, revenues for which are primarily dependent on the number of page views across its platforms. A strong social offering, which promotes user engagement can drive page views across AOL sites and will be a driver of growth for the company. However, without a strong social element, the company risks losing users to competitors, which could result in revenue declines.

Patch doesn’t match up to competition

Patch is primarily meant to be a portal for local news, and we think that users might visit the site to consume news and leave once they get the information they want. Due to this limitation, we do not think that the product can be a major page view driver for AOL, especially when compared to the offerings of competitors such as Facebook and Google+.

Additionally, since Patch lacks interconnectivity with other AOL sites such as Huffington Post and TechCrunch, we think that even if it is successful, it won’t necessarily get users onto other AOL services. AOL needs to create a social platform such as Google+, which connects other products such as Youtube, Search and Picasa, and is able to drive ad revenues in the process.

Conclusion

Overall, we think that this redesign of the Patch platform emphasizes that AOL will be focusing on social to drive revenue growth. However, as mentioned above, we do not think that Patch is a product that can be AOL’s only social gambit. It needs to create something truly revolutionary to integrate content across all of its platforms, which is the only way to get users to switch from competing sites such as Facebook and Google+.

We currently have a $29 price estimate for AOL, which is approximately 15% below the current market price.

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