AOL: Will Armstrong get any honeymoon?

AOL: Will Armstrong get any honeymoon?

Summary: AOL will lay off a third of its workforce once it is spun off as a public company. The company's ad business is a wreck. And the best thing AOL has going for it is a subscription model (read dial-up) that's also in decline. Welcome back to the big leagues where there may be little to no honeymoon for AOL Chief Tim Armstrong.

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AOL will lay off a third of its workforce once it is spun off as a public company. The company's ad business is a wreck. And the best thing AOL has going for it is a subscription model (read dial-up) that's also in decline. Welcome back to the big leagues where there may be little to no honeymoon for AOL Chief Tim Armstrong.

When Armstrong took over at AOL I figured it was a good risk-adjusted career move. AOL was a mess. Armstrong could swoop in with his Google Web cred and either fix it or say there's only so much one guy can do.

We'll see how all that goes after a few earnings conference calls as a public company. Simply put, the odds may be stacked against Armstrong and AOL's success. Meanwhile, these questions about AOL will be raised quickly if shares swoon. How many Time Warner shareholders are really going to hold AOL shares after the Internet company is spun off? And will there be buyers of AOL shares on the other side of the transaction? Add it up and you have all the ingredients for a rocky road once AOL is spun off Dec. 9.

Let's check out recent events (Techmeme):

  • AOL on Thursday said in an SEC filing that it will lay off a third of its workers to save roughly $300 million in costs. AOL is seeking voluntary departures first and then the involuntary kind if that fails. The cuts, 2,500 workers or so, is probably necessary, but morale won't be so hot for a while.
  • The AOL assets an investor buys in 2009 won't be the same as he'll hold in 2010. To say AOL is a work in progress is an understatement. Kara Swisher reports that AOL is looking to unload MapQuest and ICQ. In addition, AOL wants to transition to being a content giant.
  • And then there's AOL's financial picture. It's clear that AOL is a company still propped up by the dial-up access business. Sure, it's a fine business to milk, but it's also in decline. Armstrong should be thanking all of those consumers that still cling to dial-up access. If I were him I'd send them a ton of AOL swag. And he just might since he realizes how important dial-up is to funding AOL's future.

Henry Blodget put it well earlier this week. The gist of Blodget's take:

  • The dial-up business provides nearly all of AOL's profit.
  • The dial-up business generate 25 percent to 50 percent of traffic to AOL.
  • The dialup business is shrinking 30 percent a year.
  • The ad business is shrinking 20 percent a year.

Add it up and the plan to have a big profitable ad business to offset the dial-up unit just hasn't panned out. Will that change for Armstrong?

Given that perspective you'd be better off buying shares of EarthLink than AOL. After all, AOL is carried by the dial-up business. With EarthLink you at least get a decent dividend. Time Warner shareholders as of Nov. 27 get one share of AOL per 11 shares of Time Warner (fractional shares will be sold in the open market). Depending on how AOL trades, it could realistically make sense to ditch the AOL and buy the EarthLink---assuming you really want in on the not-so-hot dial-up business.

AOL's financial picture, divulged in Time Warner's third quarter earnings report, reveal more ugliness.

And 2010 isn't expected to get much better. Wells Fargo analyst John Janedis lowered his 2010 estimates for AOL on Monday. He wrote in a research note:

Based on more-conservative subscription revenue and search/monetization assumptions, we're lowering both our 2010 revenue and EBITDA estimates, resulting in decremental margin of about 72% versus 51% in 2009E. Our 2010 revenue and EBITDA assumptions are $2.688B (-16.4% yr/yr) and $712MM (-34.6% yr/yr), with subscription revenue down 25.8% and ad revenue down 9.8%.

The good news for Armstrong? He's starting from a low base. If AOL has any improvement going forward, Armstrong will look like a star. But he better get that ad business going or the honeymoon will be over faster than you execute a sell order on AOL shares.

Topics: IT Employment, Google

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21 comments
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  • Time to send out some free AOL signup disks (nt)

    nt
    HollywoodDog
    • And make sure they're on floppy disk!

      nt
      Joe_Raby
      • 8 inch or 5 1/4 inch?

        Which would you prefer?
        B.O.F.H.
  • Good Bye AOL

    The sooner AOL is just a shadow in the rear-view-mirror of technological history, the better.

    Since day one they were a success because of aggressive marketing not due to providing anything of any value to their customers.

    When they bought Time Warner I was appalled. They had no real value and anyone with any foresight could see their days were numbered (dial-up was going to be eaten alive by broadband).

    Good bye AOL. You will not be missed. Take the honorable way out. Fall on your sword.
    sismoc
  • I still do not understand why people...

    I still do not understand why people want compaines to go out of business.

    Do not get me wrong I hated AOL when I used them, and was glad when I left them.

    However if AOL closes that is just more people out of work, and the economy will get even worse.

    For this reason alone I hope AOL can improve their services and offerings, so more people can be kept employed.

    Hate companies all you want, but the people working for the company are trying to earn an honest pay.
    BroGnorik
    • Re: "honest pay"

      The blue collar labour force has been outsourced to China. There's no way any American company can compete with that.
      Joe_Raby
      • Not without trade sanctions

        Which for some reason are verboten even though
        China isn't playing by the rules and are
        undervaluing their currency.
        Lerianis10
  • This is a prime example of a company failing to change with the times.

    Mark your history books and avoid copy cats.

    I am glad to see AOL go but not glad they are laying people off in the process. I guess you just cant have it both ways. Course maybe the indians will have to start looking for jobs now too.

    Been_Done_Before
    • AOL's not all bad

      Try the AOL Money & Finance page. It's better than anything else I can find on the net, and that includes the brokerage firms. For one thing, the response time is really fast; like about 5 times faster than Charles Schwab, to use an extreme example. Yes, I know about Motley Fool, but they have a different purpose. In fact, Motley Fool and AOL Money & Finance go well together as a complementary pair.
      nikacat
  • AOL still exists? Who knew?

    Nobody really cares about AOL anymore. Rest In Peace. Now, if we could only get the RIAA and MPAA to follow them into the underworld, we would have peace and tranquility on Earth.
    BillDem
    • Comparing AOL to the RIAA?

      That's a low blow.

      Don't compare a company that you think should be closed to an organization where you'd like to see the executives hog-tied and dragged behind a pickup truck across the interstate.
      Joe_Raby
      • Big insult to AOl

        Now I feel sorry for them. Yea the RIAA and MPAA either needs to change and provide reasonable content for a reasonable price, or accept the fact that people will not pay $20 for a downloaded version if a DVD cost $20.

        DVD's for $20 and up it is because of the packaging and the transportation, but for a download there is no packaging and transportation cost, so a $20 should be no more then $10 for a download that you can burn to a DVD when you need to because of scratches or damage.
        BroGnorik
      • LOL true true

        I think dragging behind a pickup truck is too good for the RIAA clowns.
        BillDem
  • AOL pretty much was a government front

    AOL messenger was spyware. Headquartered in Washington DC
    area.The man was watching.
    HollywoodDog
    • I just love conspiracy theroies with...

      I just love conspiracy theroies with no actual facts provided, yet if you provide facts to someone who believes in conspiracy theories, they will just deny them to be true.

      BroGnorik
      • I could give you proof,

        but then I'd have to kill you.
        HollywoodDog
  • Here's the real problem

    AOL is cutting 2,500 people. WHAT??!! You've got to be kidding me. Why do they need 2,500 people? What in the world are all those people doing? Hand pressing free AOL sign-up disks?

    And that's only one-third of their total. That means there are 7,500 people working at AOL. That's insane.
    Bob_DaBoob
  • RE: AOL: Will Armstrong get any honeymoon?

    AOL has the same problem as the cable systems. It's
    price structure is too high and its service is
    inadequate.

    AOL kept raising prices when there was little
    competition. It manages to keep volume up by giving
    free subscriptions to new computer users. Trouble is
    every year there are fewer and fewer new computer
    users. Old customers becoming more aware of how
    overpriced it is and you get a steady decline in
    customers.

    First it was AT&T (the old Bell) that grossly
    overcharged and lost customers to the new competition.
    Now its AOL that is losing customers because of its
    gross overpricing. Tomorrow it will be the cable
    companies who will shed customers because of its
    overpricing.

    Undoubtedly someone new will eventually shed customers
    and go belly-up because of over-pricing. For now and
    in the future successful businesses will be the ones
    who are lean, good and charge less. Those who aren't
    will fade by the wayside.

    Anytime a business who waits until their competitors
    have lower prices and better service will be in
    serious difficulty. The longer they wait to compete
    the less likely their survival will be. Adios AOL!
    shanedr
  • AOL will be missed by us

    People fail to realize that there are many people still using AOL in one form or another and apparently after all the name calling won't admit it. My group does not use the dial up any more but that used to be the only company in our area that had a local number for us and they are hard pressed to find a way as easy to do what they want to online. Only a few have gone on to other ways but still keep the accounts to use now and then.

    No other online service offers my limited computer knowledge group and online presence that is truly all in one and no help needed, they sign on and all the options for what they want to do are presented to them. Granted you need to know how to install AOL and tweak it so it doesn't become a problem but it can be done easily if you have used AOL from the start and know it's install.

    I have used AOL since it came on a floppy disk going from MSN that offered me 20 mins. a month free. Over the past 3 years I have watched it go down hill with way to many ads presented in every page you use - even for paid members, it used to be a nice change to go online and not be bombarded with ads, they have already laid off all but a few of the development employees so new software is slow to no to be introduced and sometimes very buggy, they have detached from all the extra services they offered for free such as xdrive, photo storage, blogs etc.

    Altho I don't use AOL much any more I still hate to see it go for those who do and as mentioned any company that starts lay offs is sad. If you don't use AOL fine but don't judge those who do because maybe your way is stupid to them. Open Web Browser, Open IM client, Open Email Program or Open AOL and sign on, which would be easier to you?
    Northlite
  • RE: AOL: Will Armstrong get any honeymoon?

    Not if service center can't handle security issues like having an unknown person somehow hijacking a screen name in use over 18 years. We found out when setting up an appleID only to be locked out for the wrong password. I reset the password and apple sent email addressed to someone we do not know, who had somehow used one of our screen names to set up an apple account! Apple id'd the problem on the AOL side. AOL took 3 days to reach a live person... since they hide behind the UPGRADE option to provide tech help. The person I reached could do nothing to trace the issue and AOL evidently has other things to do. All aol users should check for spoofed or hijacked user names. Found ours totally by accident. AOL is toast.
    DOCBUGGS