Why HuffPo had to sell now

Following on from our previous article about the Huffington Post valuation and why, to believe it, you had to believe "6 impossible things before breakfast" I thought it might interest a few people if we went into what those impossible things are. In essence, from the previous article, you have to believe some totally amazing growth statistics for HuffPo to believe it is worth the money paid for it. These are unlikely as:

(i) The model says you need to grow at c 50% PA to break even on a 10% (ie low) cost of capital, and that was assuming a very generous Year 1 post merger $100m turnover and 20% margin. That growth is not impossible (cf Facebook) but it is unlikely - it means 5-fold growth in 5 years - because:

(2) As the amount of content farm pages rises (rapidly), the amount of Adspend going online also rises, but at a slower rate so Ad rates per page decline - putting pressure on eyeball acquisition, but

(3) There is a limit to the number of people, and the amount of time they will spend, reading HuffPo - we'd bet its before 5x current impressions are reached, because...

(4) Barriers to entry are low, and once HuffPo disappears into the AOL peanut butter it will lose its lustre while a million other copycats are hot on its heels - and what is the value retention strategy for a content mill of unpaid bloggers and linking to other people's work?

(5) I think Google et al will be forced to tone down the rankings for Content farms and near-content farms, simply because they do not give users what they wat - and Google is now competimng for search eyeballs - and no Search no Ads, No Money. It is in this light that I suspect a (small, but well advertised) proportion of HuffPo resource will be spent on real reporting, ie to try to prevent Google from treating it as a content farm.

(6) I also suspect that, as content spam becomes more prevalent, so will software blockers, as they did with email spam

In other words, I think we are nearing the high water mark of the Content Farm AdSpam business model, and in a few months it will be drastically curtailed as search engines start to select for the original authors and content spam blockers start to just cut out certain sites - which is why Demand Media, HuffPo et al's backers have to rake in the cash now. It is exit or bust (or at least a shorter and more brutish existence) so I expect to see a plethora of content farms and near-content farms trying to sell themselves now.

Fortunately, in AOL they found a buyer with a "Strategic Need".....always a goody at times like these