AOL CEO Tim Armstrong has been meeting with top shareholders in the past couple of weeks to push the idea of a sale to Yahoo Inc that could wring up to $1.5 billion of cost savings, according to Reuters.  Aside from the usual justification of avoided costs (Armstrong estimates Yahoo and AOL could eliminate $1 billion to $1.5 billion in costs), the AOL chief argues that the combined new company would be a more-efficient buy for advertisers.

Skeptics might note that merging two weak or struggling companies often does not help too much. AOL has been struggling, one might say, to create a new media revenue model based on advertising, with modest success.

AOL recently has invested heavily in news, spending $160 million in 2011 to bolster AOL’s online local news network Patch, and also spending $315 million on the Huffington Post.

Subscriber revenue, which represents about 38 percent of AOL's total revenue in the first six months of 2011, is expected to decline 23 percent this year, estimated Benchmark Co analyst Clayton Moran. Moran forecast that advertising revenue at AOL will grow 1 percent to 2 percent this year.

Yahoo has well-known problems as well, among them a strategy that has seemed unfocused. But Yahoo also has some advantages, including its mobile distribution. But beyond that, it is hard to say what Yahoo “is.” It does provider search engine functions, but also is trying to be a media property. Yahoo does have 16.8 percent share of the search engine market.

But Yahoo has been losing users to Facebook, a fact that weakens Yahoo’s value as a display-ad venue. Then there is the long-running friction with Alibaba, the Chinese company.

Despite all that, Yahoo generates $6 billion in revenues and $1.2 billion in net income, primarily as a “media” company. In that sense, a possible merger with AOL would reinforce Yahoo’s media heft. But some would argue the larger problem is the unsettled nature of Yahoo’s overall strategy.

 

Gary Kim is a contributing editor for TechZone360. To read more of Gary’s articles, please visit his columnist page.

Edited by Jennifer Russell