Armstrong's behavior another red flag for AOL

(MoneyWatch) Tim Armstrong, CEO of AOL, shot himself in the foot by apparently firing a worker in the midst of a conference call -- no matter how justified the firing.

"Maybe it was a last straw for two people who were already at odds," says James Challenger, president of outplacement consulting firm Challenger, Gray & Christmas. "We don't know the history. But the way he did this has to make everyone on the call question his ability to remain calm and poised in a difficult situation."

Armstrong, the beleaguered chief executive of AOL, is under fire because he promised shareholders that AOL's "hyper-local" news operation called Patch.com would be profitable by the end of 2013. First-half results indicate the promise will be difficult, if not impossible, to achieve. However, it was a key element in getting shareholders to turn back an attempt by an activist shareholder to get seats on AOL's board last year.

That activist investor, Jeffery Smith of Starboard Value, had sent an open letter to other shareholders in May of 2012. The letter explained -- with numbers, details and charts -- how Patch was dragging down AOL's results. It concluded that Patch simply did not have a workable business model. Why? To pay for the "feet on the ground" that Patch required to cover local news, it needs to be able to demand a premium price for advertisements. But Patch has been unable to get enough of these premium advertisements for a simple reason: Google Ad Sense can provide the same positioning for a vastly discounted rate, according to Smith's memo.

Notably, delivering community news profitably can work well in print, with many tiny newspapers boasting enviable readership and revenues, says Sean Reily, president of MalibuOne Media. "At a time when national newspapers are getting killed in the print world, the old newspaper model works in hyperlocal markets," he says. "But no one has been able to make it work in the digital world."

Armstrong, who launched Patch and sold it to AOL, is now cutting Patch sites and payroll. His now notorious conference call on Friday was aimed at rallying the troops and getting them to sign on for the difficult road ahead.

Yet, only minutes into the call, he interrupted his talk to apparently fire creative director Abel Lenz. Why? Lenz was taking a picture, something that Business Insider maintains was part of his job. Business Insider also reports that Armstrong was unhappy over Lenz's work on a redesign of Patch.

It's unclear whether a photograph in this setting was inappropriate, as is what Armstrong's feelings were about Lenz's work. AOL has refused to comment and did not return phone calls from this reporter on Monday. Yet even if jettisoning an employee is completely justified, doing it in front of 1,000 other employees is childish, demoralizing and could make it vastly more difficult for the plan to succeed, says Challenger.

"You don't fire people in public. You don't fire people in anger," he says. "This has to make everyone on the call question Armstrong's ability to remain calm and poised in a difficult situation. It takes away your staff's creativity, their willingness to take chances. It would create the feeling that everyone needs to run for cover. "