AOL Sets Out to Reinvent Itself – Again

(MoneyWatch) 

AOL CEO Tim Armstrong

Tim Armstrong, the ex-Google advertising sales chief now in charge of Time Warner's AOL division, got a laugh when he spoke in September at an interactive media conference in New York. If only that was what he intended.

A tall, dark-haired 38-year-old, Armstrong looks a bit like the actor Jon Hamm who portrays Mad Men's Don Draper, and despite his new media credentials, he is an old-school pitchman. The CEO of AOL talked passionately about how his company is reinventing itself as a content creator with an ever expanding universe of niche sites catering to everybody from political junkies to fantasy sports buffs to weather geeks to World of Warcraft addicts.

The only problem was that Armstrong overstayed his welcome, surprising the audience at the end of his presentation by proudly rattling off the names of his company's 75 Web destinations. "He went through all the brands," says Karsten Weide, an analyst at IDC who covers AOL. "It just wouldn't end. Everybody started to snicker."

A lot of people are bemused by AOL's attempts to reinvent itself. The company has re-jiggered itself almost entirely to prepare for its December 10 spinoff from Time Warner. It's as if AOL, whose name was once synonymous with the Internet itself, is now trying to become the world's largest publisher of tiny Web sites.

The strategy isn't as laughable as it sounds. After all, this is a company faced with an existential dilemma. AOL still relies heavily on income from 5.4 million subscribers, many of whom login using antiquated dial-up connections. (Yes, there are still folks who do that.) Douglas Anmuth, an analyst at Barclays Capital, estimates that dial-up users will generate 43 percent of AOL's $3.2 billion in revenues this year and 60 percent of its $1.1 billion in earnings. But these customers continue to flee, and next year Anmuth expects the number of subscribers to drop by 27 percent. Even worse, he doesn't forecast any revenue growth through 2014.

Betting on Incremental Steps

AOL execs have been dealing with this dial-up decline for a long time, of course. And they have made some big bets to try to kick-start the company, including AOL’s $850 million purchase last year of Bebo, an English social network. It was meant to take on Facebook. Have you heard much about Bebo since? Neither have we.

Now under Armstrong, the company is taking smaller steps—albeit quite a few of them. It's building the future on an Internet publishing model that has actually been in place for several years at AOL. While the company is letting go a third of its 7,000 employees, AOL execs say they’re on a hiring binge when it comes to snagging more editors and writers to spawn more sites.

“We’re still hiring journalists,” says Bill Wilson, president of AOL Media who is in charge of the content and overseas 500 full-time journalists and 3,000 freelancers who are already shoveling material into AOL’s ravenous niche realm. He describes it as “the rebirth of AOL.”

AOL’s Lost Decade

Shortly after Armstrong arrived at AOL in March, he made a curious statement to The New York Times. He said the company was plagued by “an incremental culture. By moving in very small ways, we miss the big opportunities.”

The new CEO was clearly trying to galvanize his new employees. However, Armstrong didn’t quite nail AOL’s affliction. The company has repeatedly swung for the fences—only to strike out. This is, after all, the creature from the dial-up era that bought Time Warner, home of Batman, CNN and Time magazine, for $163 billion in 2000. The deal will go down as among the worst in corporate history. But nobody ever accused its architect, former AOL CEO Steve Case, of thinking small.

Case argued that he could turn his dial-up service into an Internet media colossus by funneling Time Warner’s movies, music and magazines exclusively to AOL subscribers. Unfortunately, this was just when consumers began migrating to faster broadband services provided by their cable providers.

The old Time Warner contingent rebelled. Soon, Case was gone. His old company became a division of Time Warner, one that was dragging down the parent company’s stock. Perhaps not surprisingly, AOL floundered. “They’ve had a lost decade,” says Brad Adgate, senior vice president of Horizon Media, a New York ad agency. ‘It’s like Winston Churchill’s wilderness years in the 1930s.”

In 2004, AOL started switched strategies, offering its articles, videos and games for free. But Yahoo and Microsoft’s MSN—its key competitors—had already been doing that for years. And Yahoo, the pioneer of the group, had amassed an enormous audience.

Obviously, AOL made a big mistake by not tearing down the walls around its garden of digital content sooner. Today, according to comScore, Yahoo dominates sports and finance on the Web. Time Warner’s CNN, AOL’s corporate sibling, rules the news category.

AOL sought salvation in mergers and acquisitions. There was the Bebo fiasco. Time Warner also tried and failed to sell AOL to Yahoo last year.

Stumbling on a Business Model

The irony of all this is that AOL’s current strategy was born out of a much smaller deal, which it did almost on a whim. In 2005, just when blogs were emerging and changing Internet publishing, the company paid $25 million for Weblogs, a startup run by online maverick Jason Calcanis that created such blogs as Engadget, a technology site, and Joystiq, a magnet for video gamers.

AOL didn’t just get these rapidly growing sites; it snagged an intriguing publishing model. “What AOL wanted when it bought Weblogs was a more efficient, blog-centric publishing model that it could extend across the rest of the business,” says Peter Rojas, the former chief strategy officer of Weblogs who has since created blogs like RCRD LBL and gdgt.

That’s exactly that happened. AOL used the Weblogs approach to create new sites that were even more successful. The most notable was TMZ, a gritty celebrity gossip site launched in 2005 by AOL and Warner Brothers’ Telepictures Productions. TMZ distinguished itself—some would say disgraced itself—early on by breaking the story of Mel Gibson’s scandalous DWI arrest and offering up unflattering pictures of Britney Spears. It was a runaway success.

Today, TMZ is the third most visited entertainment news site, according to comScore. AOL had similar good luck with FanHouse, a sports site. It's the Web’s ninth most popular sports destination with a team of refugees from the New York Daily News, the Dallas Morning News and the Chicago Sun-Times.

Giving Each Site its Own Brand

In some cases, these sites carry the AOL name. But in the case of Politics Daily, a new site edited by a former New York Times writer Melinda Henneberger, readers must scroll down to the bottom of the home page to find any reference to the mother ship.

The reason is fairly obvious. It’s been more than a decade since Tom Hanks and Meg Ryan exchanged love notes via AOL in “You’ve Got Mail.” These days, people aren’t as smitten with the company and what it represents. In the age of Twitter, AOL isn’t exactly bleeding edge.

And while Wilson says the sites are gaining momentum, AOL still has a long way to go. ComScore says its monthly unique visitors declined by 11 percent in October to 98 million. Meanwhile, Yahoo, Google and Microsoft’s sites saw their eyeballs rise.

So you can see why AOL is creating Web sites at such a furious pace—three in April of this year, four in May, two in June and four more in July. The company is also trying to ramp up and better target content production with a soon-to-be-launched site called Seed.com that will let editors see which stories are resonating with readers. AOL just signed up former New York Times tech writer Saul Hansell to run it.

Then editors can assign more pieces on these topics to the company’s army of freelancers. More content, more eyeballs, more ad sales. AOL hopes it’s as simple as that.

Big Sites Lure Big Advertisers

The test will be whether AOL’s sites can attract more of the lucrative display ads that flow to Yahoo, in particular. According to IDC, Yahoo had a 17 percent share of the U.S. display market in the third quarter of 2009 while AOL only had 9 percent.

The problem for AOL is that many ad agency executives don’t think these niche sites are hefty enough yet. “None of their properties seem to be must-haves from a media-planning perspective,” says Greg Stern, CEO of Butler, Shine Stern and Partners, a Sausalito, Calif., based agency whose clients include Mini Cooper, Adobe and Priceline.com.

AOL’s response? It says it can deliver mass audiences by selling ads across its niche constellation. For instance, Wilson says AOL is particularly good at targeting hard-to-reach 18 to 24-year-old males who travel back and forth between Asylum, its Maxim-like destination, FanHouse and Engadget.

“We actually get a large network effect,” Wilson says. “We have all these people traveling though out all these sites—sometimes without them even knowing there is a connective tissue to AOL.”

This is AOL’s path to salvation. If it doesn’t work, it’s hard to imagine AOL surviving. If it does, there will be no more laughter when Armstrong goes into granular detail about niche publishing.

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