By Tom Lowry Dec. 4 (Bloomberg) — AOL Inc. Chief Executive Officer Tim Armstrong is on a mission to show that the company isn’t some dot-com has-been selling Web access and e-mail. It’s a digital- media company with 80 Web sites churning out everything from personal finance advice to bedroom tips for women. The 100 million unique viewers AOL attracts each month are enough to lure advertisers eager to reach multiple audiences with one ad buy, says Armstrong, 38, who took over eight months ago. Armstrong faces competition from Yahoo! Inc. , Microsoft Corp. and Barry Diller’s IAC/InterActiveCorp , and a slew of startups — all pushing their own content. While Armstrong says content is at the heart of his strategy, AOL already tried that and failed. Meanwhile, AOL employees, having endured multiple layoffs and strategies over the past decade, are demoralized and weary of yet another makeover, Bloomberg BusinessWeek reported in its Dec. 14 issue. “This is a challenge, I know that,” says Armstrong, a first-time CEO who took the job after nine years at Google Inc. “We have to create a company that doesn’t settle for mediocrity.” The New York-based company, which will separate from Time Warner Inc. on Dec. 10, nine years after their failed merger, has gone through multiple permutations over the past 25 years. When it was founded in 1985, it provided software for Commodore computers; a decade later, it became America Online. AOL introduced millions of Americans to the Web, and the slogan, “You’ve got mail,” embedded itself in the popular culture. As AOL’s stock soared, then-CEO Steve Case developed an ambition to acquire Time Warner, one of the world’s largest media companies. The deal closed on Jan. 11, 2001. After that, AOL adopted and jettisoned several strategies, and AOL Time Warner shareholders saw more than $100 billion in market value evaporate. Yahoo, Google Yahoo, Google, News Corp.’s MySpace, and Facebook Inc. came to define the Web. This year, Time Warner CEO Jeffrey Bewkes, who had criticized the merger when he was running Time Warner’s HBO, set in motion the divorce. He hired Armstrong as CEO. During nine years at Google, most of them as head of U.S. ad sales, Armstrong had made peace with advertisers, then suspicious of Google’s motives, and helped turn the search service into a $20 billion advertising juggernaut. “Tim needs to articulate the value of AOL,” says Robert W. Pittman , a former AOL Time Warner chief operating officer. “He needs a strong selling proposition.” Standing Ovation On March 17, a rainy St. Patrick’s Day, Armstrong made his AOL debut before 1,000 employees packed into a large tent outside the original Dulles, Virginia, headquarters. Case and former AOL Vice-Chairman Ted Leonsis spoke first. They didn’t dwell on the past and focused on how Armstrong would transform AOL. Then Armstrong, who is 6-foot-4-inches, took the podium. The crowd, some wiping away tears, gave him a standing ovation. A few days later, he reported for duty on the fourth floor of the Wanamaker Building in downtown Manhattan. AOL’s original enterprise — selling Web access — is dying, but the new operation — selling ads — isn’t big enough to replace it. Recently, the company has made up for the loss in subscriber revenue by cutting costs. Then came this year’s advertising drought. For the first nine months of 2009, AOL’s revenue dropped 24 percent to $2.4 billion, while operating profit shrank 34 percent to $765 million. According to estimates from equity research outfit Sanford C. Bernstein, operating profit will continue to decline, by 10 percent, to $880 million in 2012. Market Research When Armstrong took over, it had been almost three years since AOL had done any market research and the company had been without a chief marketing officer for 12 months. In those first days on the job, Armstrong found out he needed to reach three kinds of people; those whose still use AOL e-mail and regularly visit AOL news, music, and entertainment sites; younger people who use pop-culture sites like FanHouse, Stylelist, Spinner or PopEater, and don’t know that AOL owns and operates them; and those who gave up on AOL. Armstrong hired the ad firm Leo Burnett to conduct surveys among 5,000 people aged 18 to 65. Burnett found that most people are aware of AOL but lack strong feelings about it. About half said they didn’t know what AOL did anymore. “AOL has the awareness,” says Pittman. “It just has to drive out the fuzziness.” First 100 Days In his first 100 days, Armstrong visited 16 cities around the world. He says he has spoken with 10,000 people –employees, advertisers, investors and people he meets at conferences. He reached out to fellow executives. David Stern , a friend and commissioner of the National Basketball Association, told him not to be afraid of experimenting. Mickey Drexler , the CEO of J.Crew Group Inc., also in the Wanamaker building, regularly drops by. He told Armstrong to listen to customers and workers. Armstrong has become a student of corporate turnarounds. He asks employees to read a 1996 BusinessWeek cover story about Apple headlined “The Fall of an American Idol,” about the company before Steve Jobs ’ return. Armstrong has taken much of his road map from the Apple recovery, which he sums up as: “New products and services that people find necessary.” Yahoo and other rival sites are mainly aggregators, taking others’ content — news, politics, sports, music — and selling ads against it. Armstrong aims to stand out by creating original content. A year ago, AOL licensed as much as 80 percent of its content; today, the company says, it generates 80 percent of it. Bill Wilson , AOL’s content chief, has exploited traditional media’s implosion to hire seasoned journalists. Their expertise and voices, Armstrong says, will enhance AOL’s brand. Each week, about 30 AOL editors appear on TV and radio. Local Focus As local newspapers wither away, AOL is positioning itself as the go-to source for local communities. Its main vehicle is Patch.com, a collection of sites with a local focus that AOL acquired in June. Armstrong was an investor but agreed not to take a profit on the sale. The sites, each operating under a single editor, offer local news and sports, restaurant offerings, and events in towns with populations of 15,000 to 50,000. AOL operates 25 Patch sites and plans to have hundreds more in the next year. The idea is to lure national advertisers keen to reach local consumers. So far, advertisers are mostly local, such as colleges, arts centers and florists. Other sites, including Topix, a venture by McClatchy Co., Gannett Co., and Tribune Co., are vying for that market. AOL E-mail AOL says that e-mail drives people to its sites, particularly since visitors see a page of headlines hawking AOL content whenever they sign on. While instant messaging remains popular, regular AOL e-mail lost 15 percent of its U.S. market share in the last year to rivals such as of Yahoo and Google. To help reverse those trends, Armstrong recruited Brad Garlinghouse , a former Yahoo executive who helped the company go from No. 3 to No. 1 in e-mail. One of the first things he did was to reduce the advertising on AOL e-mail by 60 percent to eliminate the clutter. He also ditched rules that had chased away users. For example, AOL e-mail users could never put a period or an underscore in their addresses. Now they can. To help sell the new AOL to advertisers, Armstrong poached a Google colleague, Jeff Levick , calling him during a family vacation in St. Bart’s to make his final pitch. A former mergers-and-acquisitions lawyer, Levick brought with him contacts, a sense of Armstrong’s thinking, and a commitment to do for brand advertising at AOL what he had done for search advertising at Google. Too Much Inventory Shortly after he started in April, Levick concluded AOL had too much advertising inventory — industry lingo for places to put ads. He and Armstrong agreed the oversupply was hurting the rates AOL could charge advertisers. Levick cut the number of ads on the home page from 10 to one. “You raise the quality and charge a premium,” Levick says. He isn’t saying whether the tactic is working. Armstrong wants to give advertisers real-time information so they can tweak their messages. He brought in another Google veteran, Shashi Seth , whose job had been to wring as much money out of ads as possible. Seth gathered 55 AOL computer scientists and ordered them to design algorithms that can predict when demand for specific products and services peak. The technology lured ad buyer Interpublic Mediabrands. Under an October partnership with AOL, Interpublic Mediabrands will share resources and research, as well as take advantage of AOL technologies. ‘Novel Approach’ “What we’re seeing here is a very novel approach to advertising,” says Quentin George, Interpublic Mediabrands’ chief digital officer. “We’re excited about how they are looking at consumer demand when it comes to content.” Unlike some of his predecessors, Armstrong is unafraid to hitch sites to the AOL brand. In the past, he says, some AOL- owned “services were like little speedboats racing away from the AOL name,” he says. “You may or may not see the AOL name on the title of our sites, but you will begin to see a more consistent effort to promote the AOL brand on the sites themselves,” says Wilson, the content chief. Having the AOL name attached could hurt some of the sites. For example, consumers said if the Politics Daily site added the AOL name they might think the site is biased. Armstrong is embarking on a 10-city U.S. roadshow. If consumers are apathetic about AOL, some investors are wary. Having been burned by the 2001 merger, money managers may require the hardest sell. “Why would I buy AOL?” says a media investor, who asked not to be identified. “It would largely be a bet on Tim, given what he was able to do at Google.” AOL may never again be a $70 stock. By some estimates, its market cap will be about $3 billion. That’s not enough to make it into the Standard & Poor’s 500, meaning AOL won’t be able to tap the investors who buy that index. Still, Armstrong says AOL will have a chance to show investors that it is the media model of the future. To contact the reporter on this story: Tom Lowry in New York at Tom_Lowry@businessweek.com .
