New AOL Chief Is a Google Veteran

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Struggling Operation

Armstrong will have his hands full at the helm of AOL, whatever the outlook for a spin-off. Just this week, AOL began notifying 700 people that they will lose their jobs. Armstrong says his first priority will be to spend several weeks at AOL offices in Dulles, Va., and in New York, meeting employees and talking to them about the issues that confront AOL.

Since the ill-fated AOL-Time Warner merger in 2001, AOL has suffered through almost constant turmoil and management upheaval as it has tried several times to reinvent itself. In 2002, Time Warner was forced to take a $54 billion writedown related to the deal. A year later, it dropped AOL from the corporate parent's name. The latest management team—Falco, a former NBC Universal executive, and Grant, a former AOL executive and onetime chief of staff to Bewkes—failed to turn around AOL and inspire its demoralized workforce.

AOL's biggest issue has been an inability to craft strong advertising offerings that stand out from the competition, even though it has bought promising companies, including Tacoda and Advertising.com. Last year, the company tried to combine its ad offerings, including ad networks and display advertising, into one overarching service for advertisers called Platform A to provide one-stop shopping for advertisers. The effort met with little success. In early February, Time Warner reported that AOL sales dropped 20% to $4.2 billion last year. In addition to losing subscription revenue, AOL was hurt by declines in display advertising revenue and those from ad sales on third-party Internet sites. Its 2008 operating loss was $1.1 billion.

Loss for Google

Armstrong has been one of the main liaisons to Time Warner when it comes to Google's 5% stake in AOL, so he knew many of the executives there. But it was only in the past two weeks that Bewkes and Time Warner General Counsel Paul Cappuccio, the last senior executive from the pre-merger AOL at Time Warner, approached Armstrong about taking the job. Mentioned as a possible successor to Jerry Yang as CEO of Yahoo before Carol Bartz took the job, Armstrong accepted the AOL offer Mar. 11 in a phone call from Bewkes.

Google recently expressed an interest in selling back the stake, but the talks haven't progressed, says one Time Warner source.

Clearly, this is a loss for Google, which holds the preeminent position in Internet advertising, in no small part because of Armstrong's relationships through the years with advertisers. In Silicon Valley, it was largely anticipated that Armstrong, who joined Google in 1999, would be poached one day for a CEO post. "We believe the only reason that Armstrong would agree to run AOL is the ability to manage a public company of his own in the near future," Pali's Greenfield wrote in his blog. "He was unlikely to run all of Google anytime soon."

With Heather Green in New York and Robert D. Hof in San Francisco.
Lowry is a senior writer for BusinessWeek in New York.