- The Washington Times - Monday, June 1, 2009

NEW YORK | Shortly before taking over as head of AOL in April, Tim Armstrong ripped out some office doors.

The doors — made of glass and requiring a company key card to pass through — stood in AOL’s New York headquarters, separating the offices of executives such as former Chief Executive Officer Randy Falco and his No. 2, Ron Grant, from the rank and file.

The doors’ departure is emblematic of a shift under way at AOL. Mr. Armstrong, 38, was recently hired away from Google Inc. and asked to give the long-suffering former Internet unit of Time Warner Inc. yet another shot at salvaging its future after what seems like a lost decade.

If nothing else, Mr. Armstrong’s arrival has thrilled employees who were unhappy under his predecessors, who were widely considered out of touch and out of place.

But Mr. Armstrong’s more approachable style won’t be enough to restore AOL’s luster. AOL’s legacy business, its dial-up Internet service, continues to dwindle while its newer online advertising service is not yet picking up all the slack. AOL’s operations still make money, but that profit has been falling.

Mr. Armstrong’s ability to find the right formula will be put to the test now that Time Warner has formally separated itself from AOL by spinning the Internet division off into a stand-alone business. That move Thursday finally undid the $147 billion deal in which AOL bought Time Warner in 2001, which became one of the worst corporate combinations in history.

Now AOL will again become a stand-alone publicly traded firm, leaving Time Warner to focus on its own movie, cable and publishing businesses.

“Becoming a stand-alone public company positions AOL to strengthen its core businesses, deliver new and innovative products and services, and enhance our strategic options,” Mr. Armstrong said. “We play in a very competitive landscape and will be using our new status to retain and attract top talent.”

Current and former employees said Mr. Armstrong’s open management style, which he tried to show by taking out the doors, already has marked a stark change from Mr. Falco and Mr. Grant, who had snippy nicknames at AOL such as “Rondy,” a combination of their first names.

Mr. Falco and Mr. Grant joined AOL in late 2006 as part of a surprising management change by Time Warner that ousted AOL’s then-CEO, Jonathan Miller. Mr. Falco had been president and chief operating officer at NBC Universal Television Group, while Mr. Grant came from Time Warner, where he was senior vice president of operations.

Mr. Falco was a terrific media executive but he didn’t have Internet experience, and Mr. Grant was talented but had not managed large teams of people, said Ted Leonsis, an executive who retired from AOL in late 2006.

In contrast, Mr. Armstrong is steeped in the Internet. At Google, he was a senior vice president in charge of the company’s North and South American advertising operations.

“For what they need going forward, I think that somebody from the Internet, with Internet credibility, was a good idea,” Mr. Falco said in an interview.

Mr. Falco defended his tenure at AOL by noting that he had the tough job of cutting costs — $2 billion was slashed, with 2,500 layoffs, in his tenure — something that “never makes employees happy.” He also refuted the idea that he wasn’t communicative, saying he met weekly with employees in small and large groups.

Mr. Leonsis experienced the stir surrounding Mr. Armstrong’s arrival firsthand. Shortly after his appointment was announced, Mr. Armstrong invited Mr. Leonsis and AOL co-founder Steve Case to join him at an all-hands meeting at AOL’s former headquarters in Sterling, Va. The atmosphere at the meeting was “like a religious revival,” Mr. Leonsis said.

This all may bode well for employee morale, but it doesn’t mean AOL’s business prospects have improved.

The dial-up Internet service was AOL’s backbone when the company, then known as America Online, bought Time Warner in 2001. At its peak, in 2002, AOL had 26.7 million dial-up subscribers. Even as recently as 2006, dial-up was a $5.78 billion business for AOL.

But consumers have flocked to speedier offerings. Last year, AOL’s Internet access revenue was down to $1.93 billion, and now AOL counts just 6.3 million dial-up subscribers.

Meanwhile, other Internet destinations have eclipsed AOL’s free Web site, too.

In hopes of stanching the defection of users to competitors such as Google and Yahoo Inc., in 2004 AOL began shifting from its origins as a “walled garden” with subscriber-only content to an online destination where most of its news, music videos and other features were free, and supported by ads. AOL beefed up the freebies in 2006 by giving away AOL.com e-mail accounts and software that consumers had previously paid for.

Mr. Armstrong’s challenge will be to figure out a better way to make money off the busy traffic AOL’s Web sites gather.

AOL’s online properties averaged 106 million unique U.S. visitors each month during the first quarter, according to comScore Media Metrix. That ranked AOL fourth; Google, Yahoo and Microsoft Corp. were first, second and third.

“The fact that it has a large audience and makes money means wise leadership should be able to extract value from it,” said John Buckley, who left as AOL’s head of media relations shortly after Mr. Miller departed.

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