In Depth December 3, 2009, 5:00PM EST

Can Tim Armstrong Save AOL?

Armstrong may have the toughest job in media—trying to teach an old digital dog new tricks that would make it relevant to users and advertisers

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For Armstrong, the key to AOL's turnaround is original content Brad Trent

By Tom Lowry

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Tim Armstrong needs a new hip. Two decades ago the AOL chief executive absorbed a crushing hit on a high school football field. Over the years his discomfort worsened, and a few months ago his doctor told him that he should seriously consider a replacement. Armstrong, who is just 38, wasn't having any of it. He's too busy saving AOL, which on Dec. 10 will finally separate from Time Warner (TWX), bringing to a merciful end a dysfunctional marriage that lasted nine long years.

Armstrong may well have the most difficult job in media. Mention AOL, and people think: The Worst Deal of All Time! Ask them what AOL does nowadays, and most will say: I have no idea. "Tim needs to articulate the value of AOL," says Robert W. Pittman, a former AOL Time Warner chief operating officer. "He needs a strong selling proposition." Since leaving Google (GOOG) eight months ago to run AOL, Armstrong has busied himself coming up with one. It goes something like this: AOL is not some dot-com has-been selling Web access and e-mail. It's a digital media colossus with 80 Web sites churning out everything from personal finance advice to bedroom tips for women. With 100 million unique monthly viewers, Armstrong asserts, AOL has what it takes to lure blue-chip companies eager to reach multiple audiences with one ad buy.

Sounds great, right? And it might just work. But consider the challenges. Armstrong faces a landscape populated by giants, such as Yahoo! (YHOO), Microsoft (MSFT), and Barry Diller's IAC (IACI), and a slew of startups—all pushing their own content. Plus, Yahoo and Microsoft attract more eyeballs than AOL. And while Armstrong says content is at the heart of his strategy, AOL already tried that and failed. What's more, right now, advertising-supported content, according to one estimate, generates only 30% of AOL profits. Meanwhile, AOL employees, having endured multiple layoffs and strategies over the past decade, are demoralized and weary of yet another makeover. So, yes, the hip operation can wait. "This is a challenge, I know that," says Armstrong, a first-time CEO. "We have to create a company that doesn't settle for mediocrity."

Armstrong's arrival at AOL marks the latest chapter for a company that over the past 25 years has gone through multiple permutations. When it was founded in 1985, it provided software for Commodore computers; a decade later it had morphed into America Online. AOL introduced millions of Americans to the Web, and the slogan, "You've got mail," embedded itself in the popular culture. As AOL's stock took off, hubris set in, and the boyish CEO, Steve Case, developed a burning ambition to acquire Time Warner, one of the world's most powerful media companies. The deal closed on Jan. 11, 2001, amid much talk of synergies. We all know what happened next: AOL Time Warner shareholders watched helplessly as $100 billion-plus in value evaporated.

STANDING OVATION

After that, AOL stumbled along, adopting one strategy only to jettison it for another. Meanwhile, the likes of Yahoo, Google, MySpace (NWS), and Facebook came to define the Web. Finally, earlier this year, Time Warner CEO Jeffrey L. Bewkes had had enough. And Bewkes, who had criticized the merger back when he was running Time Warner's HBO, set in motion the long-anticipated divorce. He hired Armstrong as CEO. The choice was widely applauded because during nine years at Google, most of them as head of U.S. ad sales, Armstrong had made peace with Madison Avenue, then deeply suspicious of Google's motives.