May 26, 2024

A Comeback Trail Runs Uphill

PALO ALTO, Calif. — Tim Armstrong, AOL’s chief executive, will tell just about anyone who will listen that AOL is not some washed-up tech company from another era.

He says AOL will “disrupt” the online industry this year. He says that after nearly a decade of stumbles, AOL is poised for a comeback.

When hundreds of employees crammed into the company cafeteria here heard that, they applauded.

But many had heard it before, from an ever-changing string of leaders when AOL was owned by Time Warner.

AOL split from Time Warner in December of 2009.

It is different this time for the now independent AOL, says Mr. Armstrong. “We’ve made a tremendous amount of difficult changes and reshaped what the company is doing and where it’s going,” Mr. Armstrong said later in an interview. “But I’m excited now about what the next phase is.”

Never mind that AOL’s business is steadily shrinking or that its rivals are bigger, healthier and have deeper pockets. Mr. Armstrong says he has not lost faith that his overhaul, now two years in the making, will eventually reverse AOL’s steady decline and turn the company into a global digital media company with high quality content.

His biggest step was acquiring the Huffington Post, the news, aggregation and commentary site co-founded by Arianna Huffington. He put Ms. Huffington, the political pundit turned blogger, in charge of all AOL’s content business.

He also replaced AOL’s management team, expanded the local news site Patch, retired a myriad of products and redesigned AOL’s home page to display advertising more effectively.

Last week, AOL said that quarterly revenue from online display advertising grew 4 percent after more than three years of declines, a bright spot in an otherwise lackluster earnings report that showed continued deterioration in its business.

(In January of 2010, AOL stock sat at $25.68. It closed on Friday at $19.58.)

Mr. Armstrong said that was evidence that the emergency surgery on AOL was starting to pay off. But he acknowledged that it would probably take another two years before AOL’s overall business turned the corner.

The problem is, as it has been for nearly a decade, AOL’s dial-up Internet access business. The number of online subscribers has fallen to 3.6 million, from around 22 million at the time of the company’s disastrous mega-merger with Time Warner in 2000. AOL is losing 19,000 paying customers a week. Many of those who remain are either stuck in the habit of paying, do not need a faster connection or live beyond the reach of broadband.

In an effort to offset the lost dial-up revenue, Mr. Armstrong has vastly expanded AOL’s editorial operations by buying the Huffington Post along with the technology news blog TechCrunch and the video site 5min Media. He also pushed ahead with Patch, the local news start-up that he co-founded and AOL later acquired. It now has journalists covering city council meetings and charity fund-raisers in more than 800 towns.

However, those initiatives are either still in their investment phase or too small to make much of a difference financially. Patch’s spending — $80 million in the last six months alone — far exceeds its revenue, for instance. The Huffington Post, however, is expected to turn a modest profit on revenue of $60 million this year.

Ross Sandler, an analyst for RBC Capital Markets, likened AOL to an oil well that was running out of crude. It remains profitable, but has a difficult future — even in the hands of Mr. Armstrong, who Mr. Sandler said was doing a credible job.

If anything, Mr. Armstrong has been too optimistic about AOL’s resurrection, he said, suggesting that Mr. Armstrong spent too much on acquisitions with little short-term payoff while his turnaround will probably take longer than promised.

“The right decision would have been to low-ball the expectations,” Mr. Sandler said.

Mr. Armstrong, 40, joined AOL two years ago and was well aware of its trajectory. He said it was an opportunity, albeit a risky one, to lead a well-known company with big resources and a focus on online content. According to comScore, a site that tracks online data, AOL, with 118 million unique monthly visitors, has the fifth-largest online audience in the United States, behind Yahoo, Google, Microsoft and Facebook.

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