Patch.com and Portfolio Theory


May 22, 2010

I’m still a bit floored at the sudden surge of traffic to my
little blog as a result of getting picked up by Business Insider, Lost Remote
and TechMeme. While the traffic is flattering, the reader commentary is what makes it interesting.

Not surprisingly, most of the commentary was anti-Patch and
came from either competitors or hyperlocals who probably feel threatened by
their ominous soon-to-be arrival in their hometowns. I’ll admit it. I too sense Patch’s growing shadow on my little hyperlocal – and it’s something that motivates my
team to do the best work we can to prepare for the coming competition.

But the set of most interesting comments came through
Twitter
from two Indian developers, Arjun Ram and Brij Singh, who pointed out
that Patch, as well as hyperlocal aggregators like Fwix and Outside.in are
probably not counting on creating stand-alone profitable businesses, but would be part
of a group of websites operating under “portfolio theory.”

My Indian developer friends are probably right – and that
bothers me a great deal. To explain, I must digress for a moment.

Years ago, when I was a political appointee at the U.S.
Department of Energy, I was lucky to have a boss named Dr. Mark Mazur. More
than anyone, Mark taught me the value of rigorous, critical thinking – and that
if you don’t understand something, you need to ask more questions.

When I worked for him, Mark was the Chief Economist for DOE.
He’d already been a staffer for the White House Council of Economic Advisors
and one of the Senate staffers who authored the big 1986 tax code rewrite. He’s
had a number of similar jobs since DOE. Today he’s in charge of tax policy
analysis
at the U.S. Treasury Department.

Mark’s resume is important only to convey to you the wattage
of intelligence I was exposed to every day. For example, Mark once told me, “I
love the tax code. It’s like a big puzzle. Sometimes I just read different
sections just to try to see how it all fits together.” Then he pulled out a
copy of the U.S. Tax Code and proceeded to break down some obscure section with
me.

I try to carry Mark’s modest, rigorous system of study to
everything I do. On my best days, I am constantly assuming that there is more
to know before I can really understand.

So, when Brij mentioned portfolio theory, Mark’s training
sent up all kinds of flags. Here’s why:

Portfolio Theory is a finance term, that suggests that using
mathematics, you can purchase a basket of stocks, bonds and other investments
that reduces risk and thus produce a steady rate of return. So my managed portfolio ensures
that when my automobile stock goes down in a recession, I have a brewery stock that goes
up when the jobless drown out their sorrows.

Portfolio theory got a lot of attention in the boom-boom
1990’s, encouraging business schools to produce and investment firms to hire “quant
jocks” that could produce sophisticated mathematical models to choose investments. The
whole math-based portfolio system came crashing down in 2007 when the American mortgage market melted down – largely because much of it was based on rickety, too-complex mathematical models with difficult to understand metrics of success.

The complex math behind the portfolios became black boxes that nobody, even the quant jocks, completely understood. So long as the bottom line stayed in the black, there were no problems. But when some things went bad – nobody knew how to fix it, and everything went bad.

The portfolio theory for websites is similar to that with
finance. If Yahoo’s video website isn’t making much money today, Yahoo’s entertainment
news section will make up the difference. The different operations subsidize
one another, supposedly ensuring a smooth rate of return.

But I see two logic flaws with website portfolios: First,
unlike a basket of stocks, websites are not independent, dispassionate actors.
A stock will go up or down, regardless of what the investor does. Website
portfolios react specifically to the resources applied to them by their holding
company.  Second, the subsidization
process inherently disguises unprofitable, undesirable products.

Applying portfolio theory – and it’s inherent subsidies – to websites also sounds suspiciously
like the content model for a traditional metro daily. Some people read it for comics, some
people read it for obits, some for the columns and there is an expected “bleed
over” as readers jump from their favorite obits to the sports page now and
then. Yet, nobody really knows which part of the newspaper really makes money and which part is the dog.

Here’s hoping the big portfolio websites, like MSNBC.com,
Yahoo! and AOL have much better reader metrics than most metro dailies.

So back to Patch and Brij the developer’s comment, that most
news sites are operating on portfolio theory. So, AOL’s Patch doesn’t need to
be outright profitable, it just needs to channel a bunch of traffic to other
AOL sites, and AOL sites can channel traffic to Patch. National advertisers can
make just one buy, AOL, and they’ll
be guaranteed reach into hundreds of hyperlocal community news sites.

From AOL’s pristine Virginia campus, this probably makes sense. But I just can’t help but wonder: What’s the purpose of creating a business with no plan to make it stand-alone profitable?

The fact that AOL could even consider such a thing is ominous news for my little hyperlocal site, the Center
Square Journal
, since Patch could easily outspend me, as well as channel in traffic from all kinds of other AOL sites. But it’s also bad news for consumers, since there’s
nothing pushing Patch to build sites locals really want to read. After all,
what’s the profit motive if they’re already getting traffic from other AOL
sites?