There's little reason to invest long-term in AOL, Inc. (NYSE:AOL), as this former email giant now tries to reinvent itself as a media company. There aren't many believers in this new AOL. Since splitting from Time Warner (NYSE:TWX) in December 2009, AOL stock is down more than 5% while the S&P 500 has rallied nearly 22%. Having effectively abandoned email, AOL is betting all their chips on the free internet content advertising model.

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Mailing it in
Despite Time Warner sprinting for the exit from their former partnership, the AOL brand name still has some value. Part of the reason AOL has had some initial success transitioning from email provider to media company is legacy email users visiting the site to log in to email accounts. Turning a profit in the third quarter of last year, AOL has been able to capture search traffic and ad revenue from old email users. AOL's shift away from email is weakening that source of search traffic.

Legions of legacy email subscribers are jumping ship for better providers who still invest in email infrastructure. In fact, AOL has been throwing the towel in for years in the email war against Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT), Yahoo (NASDAQ:YHOO) and other providers.

Rapidly dwindling legacy subscription revenues - down 23% during the fourth quarter - in addition to free account cancellations, translates into reduced traffic, ad sales and operating margins. AOL has been able to maintain the appearance of stable margins because of restructuring and sizable cost reductions. This trend may not be sustainable, as there's barely any skin left on AOL's old bones. (For related reading, see Time Warner Growing More Content.)

Legacy email users jumping ship to Gmail, Hotmail, and Y-Mail is just one factor working against AOL. Horror stories of subscribers trying to cancel free and subscription accounts has blackened AOL's customer service reputation. AOL's notoriously difficult process for cancellation is turning away old friends.

Gambling on Content
Then there is AOL's decision to spend $315 million on liberal blog site and news aggregator The Huffington Post. The Post's left-leaning political slant could tarnish AOL's intentions to be seen as an unbiased news source competing with the likes of CNN, owned by Time Warner, or conservative Fox News, run by News Corp (NASDAQ:NWSA). Shares of AOL dropped more than 3% on the day the purchase was announced.

As AOL phases out online projects - contributing to last quarter's 29% drop in advertising revenues - a lot of cash is being spent on new content assets. The expensive Huffington Post gamble follows Q4 acquisitions of Pictela, Inc. and, Inc. TechCrunch and 5min Inc. were purchased back in September.

The Bottom Line
AOL's brand moat is failing. Soon, AOL email accounts could be a thing of the past. AOL email users who have been spurned by the company are venting on internet discussion boards with vitriolic complaints against their former provider. Plus, there are still questions as to whether the free content ad model will succeed, as better companies have made the attempt and failed. (For more, see The Numbers Behind The Recent Mergers.)

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