The Brand That Time Forgot

Ben Thompson

After a decade of losing ground in the battle for internet domination, AOL has regrouped, parted company with Time Warner and struck out on its own once more. But can ex-Google exec Tim Armstrong help the firm recapture its position as the world’s number one internet platform?

“The future is big, the future has a huge ocean of opportunity in front of it, and I think we’re going to be maniacal about improving the products and services for years to come”
-Tim Armstrong

January 2000. The dawn of a new decade - and the birth, so it was thought, of a new super-firm that was destined to redefine the media landscape. The creation of AOL Time Warner, in what is still the largest merger in American business history, was supposed to take two of the world's leading information giants and create, in the words of a statement released at the time, "the world's first fully integrated media and communications company for the internet century". And as the ink dried on the two firms' historic union - valued at a staggering $160 billion - analysts, journalists and investors hailed the deal as the coming of age for the digital movement.

Certainly, the logic behind combining Time Warner, the world's biggest media and entertainment firm, with the company that had become a byword for the internet, America Online Inc., appeared to make sense at the time. The internet, it was believed, would vaporize mainstream media business models overnight and both sides in the partnership envisioned an AOL brimming with a trove of new content from CNN, film studios, Warner Music Group artists such as Eric Clapton and more. "We've transformed the landscape of media and the internet," then-AOL Chief Executive Steve Case proclaimed. And at the height of the dotcom boom, few doubted his vision.

But the reality turned out to be very different. In fact, the companies were "both sitting on doomed business models," according to Forrester Research analyst James McQuivey. AOL was primarily a provider of dial-up internet access, with a portal highly dependent on its subscribers; Time Warner was reliant on endangered media properties such as magazines. Far from being a media powerhouse, the combined company was already rotting from within on the day it was formed. "It was the marriage of two giants, both crippled by a devastating illness," says McQuivey.

As such, it's been a sobering 10 years for AOL. Just two months after the deal was struck, the dotcom bubble burst and took the air out of the burgeoning web industry. Within two years, boardroom disagreements had driven out both of the CEOs behind the merger; and then in October 2003 AOL Time Warner dropped the ‘AOL' from its name - a symbolic slap in the face for the internet upstarts and a public assertion of the true balance of power at the faltering media conglomerate. During the course of the following years, a chastened AOL ceded its position as the world's number one internet platform to new rival Google, and stock has been falling ever since: today the value of both AOL and Time Warner combined is only about one-seventh of their worth on the day of the merger.

So when the news came that the two were parting company last year - bringing to an end what Time Warner majority shareholder Ted Turner called, somewhat melodramatically, "one of the biggest disasters to have occurred to our country" - few at either firm can have been sorry to see the back of their former partner. Wall Street gave AOL a slim chance of survival on its own. But the company had one remaining ace up its sleeve: its new boss, Tim Armstrong.

A matter of perception

When the former Google-exec took the reins last March, most commentators thought he was crazy. As the search giant's head of US ad sales, Armstrong was involved at Google almost from the outset - originally working from his house in Connecticut before opening the firm's first office outside of its Mountain View, California headquarters - and played a huge role in making Google the advertising juggernaut it is today. For AOL, the advantages of such a big-name hire were clear. "He's an advertising pioneer with a stellar reputation and proven track record. We are privileged to have him preside over AOL," remarked Time Warner CEO Jeff Bewkes when the move was announced. The attraction for Armstrong himself, however, was less clear-cut; many industry insiders felt that moving to an ailing AOL was a challenge too far - a suggestion Armstrong himself hotly disputes.

"There's a material difference between what people in the investment, media and technology worlds think about AOL and what our customers think about AOL," he argues. "As an ad customer, if you look at AOL in the US there are 100 million unique users, we have some of the best content properties online, and we offer some of the best ad serving technology out there. AOL can go head to head with any company on the internet for ad dollars at this point."

He claims that what got him "out of my chair" whilst at Google and persuaded him to jump ship for AOL was the company's past heritage - and future potential - in the internet space. "The company is big on culture, big on innovation and big on really improving our products and services," he says with all the enthusiasm of a recent convert. "Is AOL back fully recovered in the ad business? Not yet. Is AOL light-years ahead of where it was in April 2009? Yes. And can we compete against the Yahoo's, Google's and other competitors for brand display budgets? Definitely. I think many customers see the stuff we're doing as very different to what everyone else is doing, and that makes a big difference."

So just what does Armstrong have planned? In its latest incarnation, AOL is developing a digital-media business that involves everything from selling advertising to employing a staff of journalists. It has zeroed in on the market for online-display advertising - graphical messages paired with news items, sports scores or other content - all with the aim of luring in big brands. And it has placed content at the center of its business.

"I think one of the more exciting things about AOL right now is our focus on content," he confirms. "Content matters a lot to brands, and the fact that we have 80-plus percent of our own content that we're able to do branded engagement with is a big advantage. We want to provide the world's best content online, which comes down to having a complete portfolio: from big, branded, multinational content all the way down to content that's very local in its focus. And we've built systems and technology to create and support that."

Content is king

The first phase of this plan has seen AOL hire more than 500 full-time journalists - many of them veteran reporters and editors caught up in the fallout from the demise in print journalism - to create new content, alongside material bought from more than 3000 freelance contributors. Armstrong is betting that as AOL becomes better known for creating its own quality content, advertisers will pay more to place advertising on its pages. "Brand ads should be a lot bigger on the internet today and I think it's going to take hard work and creativity to achieve that," he says. Where AOL is getting creative is in building what has been dubbed "the newsroom of the future". Rather than merely craft articles and passively post them on the web, as many newspapers and magazines do, AOL is using software to determine which articles to write and give journalists up-to-the-minute data on how much traffic those articles generate.

It's a pioneering approach. News editors' computers come equipped with software - created internally by combining data from the firm's own analytic tools with other resources such as social network feeds and Google's trend-tracking service - that provides daily updates on the number of web clicks AOL's stories generate. "Audience growth and audience engagement have to be the things that we judge our journalist investments on," Armstrong says. AOL is even considering sharing a portion of quarterly profits with staffers whose work fetches the most page views.

Getting to grips with content that users want to access is crucial to AOL's future success, and as such Armstrong is focusing just as much attention on local content as he is on mainstream news. Patch, which was acquired by AOL in June of last year, currently offers hyperlocal news for 37 small towns and communities in New York, New Jersey, Massachusetts, Connecticut and California. Armstrong plans to invest up to $50 million in the service during the remainder of 2010, amidst reports that Patch will be rolled out to hundreds more communities in the near future. Indeed, he believes that local content is the next great ‘white space' internet opportunity.

"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," he explains. "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 [a local platform for people to discover and share information about things to do in a number of leading cities across the country] 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, which currently represents 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. "There's not enough content that's actually built for web distribution," continues Armstrong. "Patch is a great example. When you meet people who live in Patch towns (and I've had this experience because I live close to some of the Patch towns and have traveled to see them), people proactively say, ‘Thank you for doing this, this is really helpful. I appreciate you investing in the community'. They thank us for making their school-selection experience better, for making their travel better. Why should people still use AOL in 2010? I think it would come down to one thing: because it's helpful."

Armstrong is not only bullish on niche content but is also looking for AOL to become a content powerhouse. The company has developed its own content management system called Seed that aims to redefine journalism, and in addition has just bought internet video company StudioNow to boost its video content on editorial sites. Seed pays freelance journalists to write on subjects in demand, while StudioNow - acquired for $36.5 million in January - will let videographers post content on AOL sites for pay. Capitalizing on the trend towards user-generated content is clearly another key part of the AOL masterplan.

Putting the pieces in place

Armstrong also sees great potential for building out the advertising side of the business - something that dovetails neatly with his increased focus on content. "It was very enjoyable for me to spend the last decade at Google and I think Google will be successful for a long time into the future based on its search model," he says. "But there's also huge demand in the marketplace for display and brand advertising. For example, if you're Proctor and Gamble and you have a great product like Tide, how do you find consumers? How do you create a brand premium for Tide? How do you explain that brand to consumers? I think we're really focused on AOL being the place where those type of companies can come and build brands online."

The final piece of the AOL puzzle, meanwhile, is around enhancing the communications element. "We're working on products and services around unified messaging," he says. "It's amazing how many devices, applications and online platforms there are right now; unified messaging systems will be key. So if you look at what our team is laser focused on right now, it's content systems and platforms, it's brand advertising systems and platforms, and it's messaging systems and platforms that are unified. There has been a lot of noise at AOL in recent years, but I would say we are the most focused we've been for a long time right now."

A large part of getting that focus right has been Armstrong's attention to addressing one of the most tough-to-tackle areas of any struggling firm: that of staff morale and workplace culture. When he first arrived, he concedes that all was far from rosy. "The first thing I did in my opening three months was visit almost all of the offices we operate in to try and get a read on what the culture was - and the culture was fairly negative," he says. "The company had gone through a failed merger with Yahoo!, had been broken up to be sold off in pieces, and there were different engineering systems in every country we operated in, so there wasn't a lot of positivity and momentum. And when you're not winning, I think that has very damaging cultural effect on your employees."

That mood was probably not helped by the fact that in order to achieve planned annual cost savings of around $300 million - necessary to help it compete in the online advertising market against the likes of Microsoft, Google, Yahoo and others, and to counter double-digit declines in subscription and advertising revenue as well as drop-offs in traffic to its sites during 2008/2009 - the company announced it would be instigating a round of lay-offs and office closures in December. About 1100 employees accepted a buyout package, with another 1200 jobs slashed in January. The cuts will leave AOL at less than a quarter the size it was at its peak in 2004, when it had more than 20,000 employees.

To counter the negativity, one of the things Armstrong made a priority was establishing a culture of transparency and honesty in order to show employees where the company was headed and what was required to get it there. He also placed a focus on getting some new products out into the market. "We launched some new things, improved some of our existing products, showed some changes in our ad business and those types of thing, and I think that had a really beneficial effect," he explains. "And I think the culture has improved; people are now starting to believe that we can win. So even though we're going through a challenging time with the layoffs, we've been transparent with employees and I believe there's a lot of trust in what the company is doing."

And that trust is a two-way street, with the executive team placing its faith in the remaining employees' ability to help the company realize its turnaround goals. "What's the number one thing on our list?" Armstrong muses. "It's talent. I mean, we're maniacal on products and services and those things, but really the culture of AOL needs to be driven by the world's most talented people working on the most creative products and services. All of us are under tremendous pressure to make sure that this company is successful in the long run. We're not running from the accountability, I think we're embracing it."

A tough task ahead

2009 marked the closing of an important chapter in AOL's history and the opening of a new one - one that Armstrong and his leadership team are passionately pursuing. "We have a clearly defined strategy, and we enter 2010 incredibly focused on day-to-day execution," he says. But nonetheless, he is the first to admit that the firm faces some difficult times ahead - a view Wall Street shares.

"AOL's strategy of differentiating itself through content creation and more vertical sites will be difficult in an increasingly competitive online advertising space and with declines in unique visitors and page views likely to continue," says Barclays Capital analyst Douglas Anmuth, before adding that growing the company will be "very challenging." The access business is expected to decline 25 percent a year over the next few years - and access customers are the most engaged users of AOL's content sites. Anmuth is forecasting 2010 revenue of $2.8 billion, down 13 percent.

Despite the naysayers, however, Armstrong is positive about what the future holds for AOL. "The future is big, the future has a huge ocean of opportunity in front of it, and I think we're going to be maniacal about improving the products and services for years to come," he says. "We're going through a very difficult time in terms of a layoff period right now, but I think of all the years that I've spent doing internet stuff, I don't think I've ever been more proud of a group of people than I have of the AOL employees. I think we have made real progress, and I hope investors see that in 2010 and 2011."

For many of those investors, speculating on AOL since Armstrong took up the top job has been a lot like betting on the jockey rather than the horse - a fact that Armstrong himself acknowledges, albeit with the caveat that much has changed at the company over the last 12 months. "I don't think people understand what's at the company, what assets we have, and what the ability for us to play a big part in the future of the market is," he explains, before adding with tongue planted firmly in cheek: "Our horse needs a lot of training and directional help, but we're working on those things."