Photo illustration by Glen Wexler
Because Wall Streetviewed AOL as Time Warner's most potent growth engine, Miller was ordered to boost net earnings, even though revenues were shrinking from canceled dial-up subscriptions. He had no choice but to cut thousands of jobs, while Time Warner used AOL as a cash cow, sucking out more than $6 billion between 2003 and 2007. Miller nearly tripled operating income, to $1.9 billion, while revenues fell by 8%.
On Miller's watch, one unquestioned home run was the 2004 purchase of Advertising.com, a leader in placing ads on millions of independent Web sites across the Internet. AOL's ad revenue rose steadily from $781 million in 2003 to $1.3 billion by 2006. That set the stage for Miller's next coup: In August 2006, AOL finally moved to offer all of its Web content for free. That hastened the dial-up customer exodus, costing at least $1.5 billion dollars in annual subscriber revenue, but it also signaled to investors a brash confidence about AOL's future prospects. When Miller reported astronomical ad growth -- 46% in the third quarter of 2006 -- Wall Street became a believer too. Time Warner's shares shot from $16 to $23 in six months, adding some $20 billion to the conglomerate's value.
Miller's reward for this achievement was a pink slip. In early fall, Miller had met Randy Falco for a drink at Bewkes's suggestion, with the implication that Falco might join Miller's management team. In mid-November, Miller learned from reporters calling for comment that Falco was replacing him. "Time Warner is a cutthroat environment," says a former executive. "Bewkes and Miller never got along. When Bewkes became president [in late 2005], he wanted one of his guys in there." Bewkes thought AOL needed someone with Falco's operations expertise to make the new ad strategy gel. (Falco had nicknamed himself "the Conductor" at NBC for his obsession with running the trains on time.) To AOL employees, it appeared that just as their business was finally rising from the mat its own parent threw a sucker punch.
To AOL employees, it appeared that just as their business was rising from the mat its own parent threw a sucker punch.
But there was another major blow to come. Even as a handful of executives followed Miller out the door, Falco had to prove that AOL's ad growth had been no fluke. And he was all smiles. Around the time of the Seriff all-hands meeting -- shortly before Time Warner's second-quarter 2007 results were released -- Falco even remarked publicly that ad growth was "doing what we had hoped, and a little better."
It now seems predestined, given AOL's tortured history of disappointment, that those assurances would prove false. The company's ad figures failed to meet expectations, rising just 16% that quarter, and the investor backlash was brutal. Worst of all, the shortfall was largely attributable to the new team's own moves.
Grant had grown increasingly concerned during the second quarter about AOL's search pages losing traffic. In November, search had posted 38.9 million visitors; by May, the figure was down to 35.2 million. Grant zeroed in on the multimedia character of AOL query results: If you searched for "Radiohead," for instance, you would get not just text articles on the band but also images, video, and links to their songs. Grant saw this differentiation as a weakness -- it slowed load time, and the rich results meant that users were less likely to refine their searches, thus delivering below-average page views. He ordered a change to the page, making it look and operate exactly like Google's. Yet it turned out there were ways in which some users actually preferred the old format. It was certainly different, offering people a reason to go to AOL rather than Google. And the below-average page views could be seen as a sign that users were finding what they wanted the first time through. Also, according to former executives, the old search page actually produced more revenue per search than Google's.
In any case, changing the page backfired, badly. Search revenue fell to $156 million, from $232 million the previous quarter. As a result, AOL missed its revenue targets. "Management was blindsided by how disruptive the change to search was," says Pali Research analyst Richard Greenfield. "It's troubling that they didn't know what the impact of the search change would be. This raises serious concerns about their ability to run the business and turn it around."
Falco dismissed the search mishap as a "hiccup," and Time Warner executives defended the move as being good for traffic growth. But over the next six months, search users fled even more quickly than before. Monthly unique visitors were down to 30.6 million by November 2007, according to comScore. (Grant's tweak still remains in place.) In August, Falco had to retract his earlier assurance that he would continue to grow ad sales "faster than the industry." He ended the year with 18% ad growth, scoring only 10% in the fourth quarter, significantly lagging the online-ad market's 26.8% annual growth in 2007. As Jeff Bewkes ascended to CEO in January, AOL was once again playing its customary role as Time Warner's millstone.
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Recent Comments | 13 Total
March 22, 2008 at 12:07am by Not Disclosed
///Then there were the technology challenges. AOL's sites were written in a proprietary code, Rainman, that was incompatible with standard browsers and search engines. Ad servers couldn't read it either -- one reason ad revenues slumped from $2.6 billion in 2001 to $781 million in 2003. The company would have to invest a fortune in tech upgrades just to get to the starting gate.///
This is just pure BS. Which is perpetuates from an article to an article. The saddest part is that AOL execs believe that even today.
There was nothing that prevented Rainman from generating the content that was quite compatible with "standard browsers and search engines". It was done and it is done even today. Take AOL France Welcome Screen as an example.
Technical illiteracy of AOL execs made them trust snake oil salesmen. But that did not help either, did it?
Let me ask you: why it was so important to make AOL "go after Yahoo"? Why not make a bunch of Web brands they had chase Yahoo and leave AOL Flasgship service alone? Netscape, AIM, ICQ, Winamp, Compuserve! Sure they could make a thriving web brand from at least one of those if there was a theoretical possibilith of thatthey, couldn't they? And they would not have to deal with that dreadful Rainman. why not just leave the AOL Sevice alone? The "New Coke" marketing lesson: don't mess with the products that work! I guess they did not teach that in Harvard business school.
March 25, 2008 at 9:50am by Bob Jones
To be fair, S&B didn't know what they were getting into. While AOL was growing, there were still problems that needed to be dealt with. There continued to be a need for a vision about where and how AOL would play as a Web company - we can't expect S&B to have that vision as they were relative newbies. S&B and TW thought they could go in with purely execution in mind while riding the gravy train to growth. Big mistake. After spending the first 6 months learning about the company, the industry, and the problems they faced, S&B tried what they thought to be fast and prudent moves to solve the problems but it was 1 year too late and some of it backfired. Instead of treading new ground, AOL was back to playing catch up to the competition. This is the problem when office politics overrule logic and vision. And, in my opinion, is largely a result of the shark infested waters at TW.
March 25, 2008 at 2:23pm by Media Maven
Turning around AOL was a task no one could accomplish, given the constant demands from the parent company to generate income growth to offset the performance of Time and other old media assets. That tactic forced the company to obsess about mechanisms to prop up the dial-up cash cow, even as the tectonic plates of technology were shifting underneath them. Did AOL, at some point over the last 5 years, have assets to exploit to shift to a new business model? Yes, but at no point could the transition to an ad and search model be supported without re-baselining the business, a journey that Dick Parsons, Jeff B, and others were unwilling to undertake. They have a major role in the accountability chain for the whole AOL journey.
So, with these short-term earnings constraints, what did you get? A half-hearted transition, with the dial-up business still generating the majority of the earnings out of an aging and not very credit-worthy user base.
I think that some of the moves (the purchase of advertising.com, userplane, weblogs, the formation of TMZ.com, and the shift to a more robust free portal to retain customer traffic, etc.) were all decent moves, given the performance and investment constraints imposed on AOL, but without a new wave of initiatives to keep the journey moving forward at speed, in 2007 you began to see the languishing advertising growth starting to occur. In my eyes, Bebo is the first real new move by Randy Falco and Ron Grant that isn't a derivative of the Jon Miller-crafted playbook (I would say their hubris in claiming some intellectual highground over Miller was bad form as leaders, but that's another topic), and that's how I will grade them as business strategists going forward. I wish AOL the best of luck, but with the TWX stock trading at new lows, even when rumors of AOL being purchased hitting the wires, I think the analysts (Jessica Reif Cohen et al) still bullish on the stock should have their tickets pulled - they have done their clients a huge disservice by keeping them in the stock as it fell from its $23 peak...
March 25, 2008 at 3:37pm by Anonymous still anonymous
What a sad testimony to a fallen dynasty - one that others should take note of. AOL's problem was one of arrogance - pure and simple. The universe took care of this by installing a "tower of babel" that still exists today. The only thing left are employees who wistfully yearn for the "good old days".
March 25, 2008 at 5:43pm by Mark Zorro
I have not followed anything about AOL but I find the responses to this article as well as David Case's piece highly insightful. Normally I don't focus on corporate autopsies or ugly micro-details but I can learn much by digging into the piece because David Case has written comprehensive piece (with or without flagged sections by respondents) and the prose laced with meaningful numbers is brilliantly presented. It actually surprised me to read this level of detail here and I really am only going to significantly grow my learning if I continue to come across pieces that are incomprehensible to a dweeb thinker......M.
March 26, 2008 at 9:15pm by James Belle
perhaps they should have learned from Yahoo's mistake in hiring a guy from Hollywood to do a tech job! I don't think AOL is necessarily a dead man walking, they can still turn it around.
March 26, 2008 at 11:40pm by Bill Later
Enough already... Can someone just please shoot this company in the head? Elvis left the building when Pittman moved to NY in 2000 to take his ill-fated CEO in waiting spot at TW. There hasn't been any talent left in Dulles since. Idea: Number the employees and fire the odd-numbered ones (hell, ok, the even ones then). Then distribute all the savings to shareholders in a dividend. They deserve it after the stock's performance for the past 8 years.
May 2, 2008 at 5:25am by Desmond Haynes
Interesting read http://techwatch.reviewk.com/2008/04/comscore-reports-increase-in-traffi...
... building AOL into a major digital ad-sales firm.” The content push “is part of AOL’s bid to reinvent itself as an ad-supported Web company following its August 2006 decision to make its Internet-access service free. Visits to AOL’s Web sites slowed as a side-effect of that decision. … To draw visitors back, AOL redesigned sites in the news, sports and health categories. It also created a half-dozen new sites that don’t use the AOL name, such as a technology-focused site called Switched, a hip-hop site called BlackVoices, and a Web trend tracker called Urlesque.com, as well as Asylum. Dropping its name was an acknowledgement that the brand wasn’t hip enough for the consumers AOL was trying to attract.” AOL “also adopted some common tricks of the trade, such as making its sites appear higher in search-engine results....
May 16, 2008 at 5:02pm by Kasey Marcum
Very well written, David.
I am surprised that the employees aren't fleeing at an alarming rate. It has been obvious for a while that AOL should just give it up. Not sure why one would continue to work in this kind of environment.
October 26, 2009 at 2:54am by Somchai Yhai
I agree with James Belle,
"Tech job for tech guy".
Somchai Yhai
VP of Marketing at หางาน