Adding the final leg of its new strategy to reinvigorate AOL, the Time Warner online unit said it was buying two small local start-ups, Patch Media and Going.

Each acquisition–which focuses on hyperlocal community news (Patch) and events (Going)–is small, about $10 million.

Ironically, local has previously been a big arena for AOL, which launched its Digital City unit with great fanfare more than a decade ago. AOL still runs Digital City, as well as its CityGuide listing offering.

But, in a move that will surely be scrutinized, Patch is a company whose principal investor has been AOL’s new CEO Tim Armstrong. AOL declined to say how much he had invested in the company, but sources said it was less than $5 million.

Armstrong addressed the issue in an internal memo to staff about the deal, noting he would forgo any profits from the AOL transaction for Patch and get back the seed money he put into the start-up in the form of AOL shares:

“On a personal note, I was an early investor in Patch and committed significant dollars to the vision of improving local communities with deeper online information, accountability through journalism, and a platform for communicating. In discussing our local strategy, AOL and Time Warner looked at Patch as a possible acquisition and I recused myself from that process. At the Time Warner negotiated acquisition price, I was in a position to earn a return on my investment in Patch. However, I have decided to forgo any profit from my seed investment in Patch and I have asked to receive just my seed capital in AOL shares once we separate from Time Warner.”

The New York-based Patch is a platform that does deeply localized coverage of communities about a range of topics, from announcements to news to events to obituaries. It is aimed at competing with local newspapers and other media.

In another interesting twist and blast from the past, Boston-based Going was funded–its last investment was $5 million in mid-2007–by two Web 1.0 portal execs, George Bell of Excite and Bob Davis of Lycos.

Both are now venture capitalists–Bell at General Catalyst Partners and Davis an Highand Capital Partners.

Going, which was originally called HeyLetsGo.com, connects its users with events and each other in a variety of big cities, such as San Francisco, Boston, Chicago and New York.

The focus on local will round out Armstrong’s new push for innovation at AOL, the final piece of his ongoing 100-day evaluation of the much-beleaguered company.

Armstrong has been busy in that time in making massive changes to the structure of AOL, sweeping aside its current set-up almost completely as it prepares for a spinoff from Time Warner (TWX).

That spinoff was announced recently and will result in AOL becoming a standalone company.

AOL’s new business strategy under Armstrong includes keeping its longtime access business, which many thought would be sold off, and putting many of the companies it has recently acquired–including its pricey Bebo social-networking site–in a separate ventures unit, which will try to attract outside investment.

The strategy will focus AOL on several key areas, including access, media/content, “scaled” advertising and communications, and now, local.

Local is also a big focus for players like Yahoo (YHOO) and Microsoft (MSFT) again. Yahoo CEO Carol Bartz specifically mentioned adding more community news, especially about local sports, to its offerings, in an onstage interview two weeks ago with me at the seventh D: All Things Digital conference.

Here’s the internal memo and press release about Patch and Going below:

AOLers –

Our strategy to win in the five areas we’ve discussed starts with innovation and passion. Of the five areas, Local remains the largest white space and offers us an ability to improve the lives of many consumers. It’s a space that’s prime for innovation and an area where we already have strength with a local network that reaches more than 54 million UVs a month and a valuable brand in mapping services, MapQuest.

Our vision isn’t just about optimizing what we have–it’s about overhauling how we approach this space, drawing on our legacy of connecting communities and our long history of organization through DMOZ. It’s about taking one of the most disaggregated experiences on the Web today and making it truly quick and easy for consumers to find the local information they need.

Today, we’re announcing two acquisitions that will enable us to better serve audiences by providing experiences that are highly focused on users’ own neighborhoods–Patch and Going.

Patch.com was built to provide local towns with a robust and interactive platform to publish news and information, with full-time journalists for each town covering government affairs, education issues, and community events. One of the AOLers in our All Hands meeting on May 29 asked what our plan is to help towns, like his, where the local newspaper has gone out of business. Patch is an acquisition that may eventually help that town. Under the leadership of co-founder and CEO Jon Brod, Patch has been able to launch five initial town sites since February and has just announced four additional communities. Moreover, Patch has already received over 230 user requests for “Patches” spanning 39 states and 12 countries.

The second acquisition is a small company located in Boston–Going. Going has developed a local events platform to discover and share information about things to do in a number of leading cities across the country. Under the leadership of CEO Evan Schumacher, Going has launched sites in 30 cities–including New York, Chicago, Los Angeles and Miami–and provides users with RSVP tools and advertisers with self-service event advertising.

On a personal note, I was an early investor in Patch and committed significant dollars to the vision of improving local communities with deeper online information, accountability through journalism, and a platform for communicating. In discussing our local strategy, AOL and Time Warner looked at Patch as a possible acquisition and I recused myself from that process. At the Time Warner negotiated acquisition price, I was in a position to earn a return on my investment in Patch. However, I have decided to forgo any profit from my seed investment in Patch and I have asked to receive just my seed capital in AOL shares once we separate from Time Warner.

Overall, I believe both Patch and Going will add strength and talent to our local efforts and give us an ability to have a unique and defendable local offering that helps people improve their lives. I’m excited that we’ve reached the stage where we can begin implementing in our five key strategy areas, and with today’s announcements we’re off to a great start in Local.

Please join me in welcoming the employees of Patch and Going to AOL and the future of AOL Local. –TA

AOL Acquires Two Local Services, Patch and Going

Acquisitions Add to AOL’s Leading Network of Local Services with a Community-Specific News and Information Platform and a Local Event Platform

NEW YORK, NY–June 11, 2009–AOL today announced two acquisitions in the local space: Patch Media Corporation, http://www.patch.com, a local news and information platform aimed at serving local towns and communities and Going, Inc., http://www.going.com, a local platform for people to discover and share information about things to do in a number of leading cities across the country. Both Patch and Going offer local experiences, content and self-service applications for consumers and advertisers.

“Local remains one of the most disaggregated experiences on the Web today–there’s a lot of information out there but simply no way for consumers to find it quickly and easily,” said Tim Armstrong, AOL’s Chairman and CEO. “It’s a space that’s prime for innovation and an area where AOL has a significant audience and a valuable mapping service in MapQuest. Going forward, local will be a core area of focus and investment for AOL. The acquisitions of Patch and Going will help us build out our local network further with excellent local services that enable people to stay better informed about what’s going on in their neighborhood.”

The acquisitions extend AOL’s network of local services, the largest online local network,* reaching more than 54 million total unique visitors per month.** Both acquisitions also leverage a consumer and marketplace trend toward greater consumption of news and information online.

A recent survey by the Pew Research Center for the People & the Press found that more people now say they get most of their news from online sources than from traditional newspapers (40% vs. 35%).***

In addition, local searches grew 58% in 2008 year over year, while overall searches climbed just 21%, according to research conducted by the Yellow Pages Association in March 2009.

Local advertising (online and offline) represents an approximately $103 billion market (approximately 39% of total U.S. ad spending), according to Borrell Associates in 2009.

Founded in December 2007 and headquartered in New York, Patch combines localized, professional journalism with community contribution and a platform that puts all town assets online – in effect, digitizing the community. Patch, which expects to be available in a dozen communities by the end of the year, currently has “Patches” in five communities with four more in development.

“We are excited to join the AOL family,” said Jon Brod, CEO of Patch. “AOL’s substantial network will help us extend the reach of Patch into more and more communities. And Patch, as part of AOL’s local strategy, will create new opportunities for AOL to delight consumers and provide marketers access to highly targeted and deeply engaged audiences.”

Launched in September 2006 and headquartered in Boston, Going is one of the leading local communities for 20-somethings looking for things to do in cities across the country. Going is available in 30 leading U.S. cities, including New York, Los Angeles, Chicago, Miami and Boston, with several more planned this year. Going also provides local promoters, event organizers and venues a fully automated, self-service RSVP, ticketing and advertising engine to maximize the attendance and value of their events.

“Going allows young people in leading cities to discover upcoming events, parties and new hot spots – and most importantly connect with others who share a similar lifestyle. By joining with AOL, we have the opportunity to greatly expand the reach of our platform to more cities both in the U.S. and around the world,” said Evan Schumacher, Going’s CEO.

“AOL has a legacy of connecting people to the content, community and services they care most about,” said Armstrong. “Patch and Going, combined with our existing network, will enable the company that got America online, to connect consumers around the globe to their communities online.”

* April 2009 U.S. comScore Media Metrix; Local Networks category is a custom built category by AOL.
** Custom AOL-defined Local Networks report, based on comScore U.S. Media Metrix Audience Duplication report (April 2009).
*** Pew Research Center for the People and the Press, “Internet Overtakes Newspapers as News Outlet,” December 2008.

Last year, Yahoo EVP Hilary Schneider and then-Media Group head Scott Moore had a summery seaside dinner with Demand Media co-founder and CEO Richard Rosenblatt (pictured here) in Santa Monica, Calif., right around the corner from the online publishing company’s HQ.

While many speculated that Yahoo (YHOO) could be doing some friendly kibitzing to get a sense of where the eclectic network of general- and special-interest sites was headed, for a possible acquisition, nothing came of it.

That’s because at the time, Rosenblatt insisted that he was aiming to eventually take his company public and Yahoo was in the midst of ongoing corporate turmoil.

“There is a lot of potential here and I want to build a big company for the long-term,” said Rosenblatt in an interview with BoomTown last July (see video below).

But, as my post noted: “Still, at some point when Yahoo is not in the free fall it is currently in, Demand might make a great purchase for Yahoo.”

And now, a year later, as new Yahoo CEO Carol Bartz works to stop that slide, several sources close to the company tell me another look-see at Demand is likelier than ever.

That’s underscored with recent indications that a major strategy will finally follow through on making Yahoo’s massive but disparate service more social, especially its content offerings.

But would Bartz go as far as making a big buy now or would she be more likely to strike a massive partnership with Demand, from which Yahoo could learn a lot?

Such an acquisition could cost anywhere from $1.5 billion to–as was floated last year in better times–$3 billion. In addition, if Demand was to engage in more serious talks with Yahoo, there would likely be other suitors.

As costly as that is, some sort of link-up with Demand is an interesting idea, especially since Yahoo could use a bold and definitive move to signal social goals that play to its strengths and are not a copycat of more powerful social-networking sites now in place.

At a Morgan Stanley (MS) conference last month, Bartz said, for example, that “I do not believe we can invent the next Facebook,” while noting Yahoo still needed to be more social throughout the service, especially in its content.

And, just yesterday, a Reuters article about that focus was titled: “Yahoo’s Plan: Create Community from Isolated Sites.”

Said the article: “If [Yahoo co-founder David] Filo and new CEO Carol Bartz have their way, the kinds of social networking features available on Facebook will become part of many Yahoo websites and allow their users to network with each other without using Facebook. The company hopes the strategy will help link its disparate properties, bringing more advertising dollars and growth.”

And that’s just at the heart of Demand Media, which dubs itself the “leader in social media.”

Demand was founded in 2006 by Rosenblatt and Shawn Colo, who raised a giant pool of funding–$355 million–from gold-plated investors like Goldman Sachs (GS), Oak Investment Partners and even a private investment from major Yahoo investor Gordon Crawford.

Getting that kind of backing was due to Rosenblatt’s entrepreneurial track record.

As founder, chairman and CEO, he sold iMALL to Excite@Home for $425 million in a 1999 stock swap.

And, perhaps most famously, as CEO of Intermix Media, Rosenblatt sold it with the company’s crown jewel, MySpace, to News Corp. (NWS) for $580 million in cash.

Then, Rosenblatt started Demand, which takes user-generated content of all kinds and on all kinds of topics–especially via video–from an army of freelancers and leverages it into massive traffic that it monetizes.

Demand is also the one of the bigger suppliers of video to YouTube, which it also monetizes.

And, through the acquisition of Pluck, the company also laces social-networking tools throughout the sites, as well as for many well-known third parties.

All this has given Demand upward of 70 million unique visitors per month, at sites like eHow and GolfLink.com, with about $150 million in annual revenue.

And–drum roll please–it is reportedly profitable, although how much is not clear.

While he has long maintained a public offering was on the horizon, despite the weak economy, Rosenblatt has also been interested in the idea of how to revive major players like Yahoo and Time Warner (TWX) online unit AOL.

Both have been struggling, but still have massive traffic and brand recognition, along with large advertising businesses.

And in many ways, the energetic Rosenblatt is just the kind of product-centric and visionary exec Yahoo lacks, despite Bartz’s clear ability to get the company’s management ducks in order.

What could be even more interesting, said one source, would be to marry Yahoo and Demand with a lot of what is going on with the publishing of niche sites at AOL’s MediaGlow content unit, in a giant publishing network.

Ironically, AOL was another acquisition target of Yahoo, in yet another deal that did not pan out last year.

Here’s the interview with Rosenblatt at Demand Media HQ last year:

As has been copiously reported here and all over, Yahoo and AOL have been engaged in never-ending talks about a possible deal to merge their flagging Internet businesses.

Now, sources tell me, the circle of executives at both companies interfacing with each other has been widened, for purposes of due diligence.

That chit-chatting includes Yahoo CEO Jerry Yang, who has been in New York several times recently [UPDATE: But not yesterday, in a story I had previously linked to here]–where AOL parent, Time Warner, is located–to meet once with its CEO, Jeff Bewkes, and see if they can actually complete the merger.

Now, all this frantic activity does not mean a deal will necessarily be struck. In fact, in typical Yahoo style, it is going very slowly and that is never a good thing in dealmaking.

But it is this kind of ramped-up blabbery that has many at both companies predicting–hoping, really–that a deal will go through, sooner or later, as soon as Time Warner and Yahoo can agree on a price.

Or, more precisely, a percentage, since Yahoo’s stock price has been falling like a particularly sharp knife of late.

Sources said Yahoo does not want Time Warner (TWX) to have any more than 25 percent of the new company in a trade for AOL’s assets–although that figure would be slightly more if the media giant throws in some of that “Harry Potter”-generated cash into the deal kitty.

Yahoo (YHOO) management, sources said, also think its assets are of significantly better quality than AOL’s, and it still has that powerful–although declining–share in the lucrative search market.

Thus, it does not want to pay the $8 to $10 billion price Time Warner wants, and it should not either. (Here is a good analysis on the price issue by Silicon Alley Insider’s Henry Blodget.)

But Yahoo shares closed yesterday at a troubling $14.58, down 73 cents, or almost five percent.

That means its market valuation also declined by many billion dollars very quickly. It is now at $20.2 billion.

These profound stock drops, said several sources, could spur Yahoo to act before it gets even worse, which is why talks have been more frequent in recent weeks.

While not the best state of mind, panic is always a good motivator, and both companies are surely desperate to turbocharge themselves in the face of tough competition and avoidable management mishaps in recent years.

The hope? That together the pair can do better than they have separately–by combining their advertising, content and communications assets, which are among the largest in the world.

In addition, the “new” Yahoo would be able to make massive cost cuts, including layoffs, under the cover of integration and starting off with a clean slate.

So who would emerge more powerful in a new set-up–AOL or Yahoo?

Here’s a short cheat list:

Content:

AOL and Yahoo have a similar range of content assets, with big sites in all the classic categories, like news, financial, sports and lifestyles. Yahoo’s content head is Scott Moore, while AOL’s is Bill Wilson (both pictured here, left to right).

As I wrote yesterday, I expect that the more dominant Yahoo will rule, slashing and burning most of the AOL-branded properties, keeping only interesting newer brands like sports blog FanHouse, celeb blog TMZ and the Engadget, Tuaw and JoyStiq tech blogs.

And while former Microsoftie Moore is the likely head of this behemoth, don’t count on the very adept Wilson, who is known as a skilled corporate player at AOL, to stick around without a big role in this arena.

Communications:

Again, advantage Yahoo, which has bigger calendaring, email and instant messaging assets, an area once overwhelmingly dominated by AOL. That was then, of course.

Still, AOL’s communications tools are used by a huge audience worldwide and the pair together would be a powerhouse. So much so, in fact, that this might be the one major regulatory hurdle any deal would face.

Advertising:

Again, Yahoo would probably dominate, having just hired well-known former Microsoft exec Joanne Bradford to head up U.S. advertising sales. AOL’s top ad exec is Lynda Clarizio, a former lawyer who is considered dogged but much less experienced than Bradford. (Both are pictured here, right to left.)

And, Yahoo does have its search ad business, however weakening, and a stronger graphical ad business, even if the sector will be most under siege in the current down economy.

Plus, AOL’s Advertising.com, while a major ad network, is more of a business subject to bruising competition and squeezed margins.

Community:

Tapan Bhat (pictured here) now rules community at Yahoo, as well as its homepage, having just inherited it from the departing Brad Garlinghouse.

But AOL has a savvy and voluble exec in Joanna Shields, who came recently via its Bebo social-networking acquisition. While AOL woefully overpaid for Bebo and got played into thinking that other bidders were more interested than they actually were, it was Shields (pictured here) who essentially did that playing.

Sign her up for a top exec role in the combined company pronto!

In all seriousness, there is room for both in the newco, as both AOL and Yahoo seriously bite in the social-networking space. They will surely need a lot more than Bhat and Shields if they want to become true players in Web 2.0’s hottest and probably most important trend.

Engineering:

Yahoo. I do not need to explain this, do I?

Okay: AOL has always been incompetent in the technical arena, since its beginning days, compared with Silicon Valley companies like Yahoo.

All yours, Ash Patel!

Management:

Now, it is here that it gets interesting.

Most feel the push by Yang to do an AOL deal–and make no mistake, it is being pushed by him most of all–is due to increased pressure from his board, as well as major investors, who have had just about enough of his leadership.

“There is no way Jerry stays on as CEO in a newco,” said one source about Yang (pictured here). “He’ll be kicked upstairs as chairman, and I will think [President Sue] Decker will also have to go eventually, since there will be a lot of resistance if she is named CEO.”

But, said other sources, these major management changes will not happen immediately, if at all, as it is too distracting in the wake of a deal and ruins the positive “story” that both companies will surely want to spin.

And spin they will! (Go, Tricia! Go, Jill!)

And while he has a reputation for sharkish political skills, especially compared to Yahoo’s very diplomatic U.S. head, Hilary Schneider, expect AOL President Ron Grant to be an important part of the transition, since he is good–almost too good–at cutting costs.

Most expect his boss, AOL CEO Randy Falco, not to be part of the new company, thereby separating him and Grant, who are nicknamed “Smithers and Burns” at AOL, after “The Simpsons” creepy duo.

Most likely, there will be a search for a top-level CEO to take over the combined company–someone of the stature of New Corp.’s No. 2 Peter Chernin or eBay’s former leader Meg Whitman (except now, she is apparently Sen. John McCain’s pick for Treasury Secretary, if the Republican Presidential candidate were to win the election).

“If this has any chance of working out, the board has to push restart on the leadership,” said one person close to the situation, who notes that this deal is Yang’s last chance to truly impact the future of the company he co-founded and preserve its legacy. “Everyone gets that, even Jerry.”

But I think the idea that Yang would leave if there were to be a merger of Yahoo with AOL is wishful thinking on the part of his critics.

He appears tome to be very committed to seeing his vision of turning around Yahoo through.

And those who have counted him out always seem to be the ones who have been typically wrong, such as Microsoft CEO Steve Ballmer and shareholder activist Carl Icahn.

Because, for all the turmoil at Yahoo, it’s Yang still calling the shots.