It's official: AOL ends ties with Time Warner

Unlike in the 1990s, though, when AOL got rich selling dial-up Internet access, it starts the 2010s as an underdog, trying to beef up its Web sites and grab more advertising revenue.

Despite a few bright spots in its portfolio of sites, such as tech blog Engadget, AOL has a long way to go until Web advertising can replace the revenue it still gets from selling dial-up Internet access. One especially popular property, entertainment site TMZ, is a joint venture with a Time Warner unit that will keep TMZ and its revenue after AOL splits off.

AOL will initially be worth about $2.5 billion, based on the value of preliminary AOL shares that have been trading ahead of the formal spinoff this week.  In the past year, AOL hired Armstrong, a former Google advertising executive, to engineer a turnaround that eluded the company while it was part of Time Warner.

Company’s struggle

In those years, AOL struggled to complete its transition away from relying on its dial-up business. The service peaked in 2002 with 26.7 million subscribers, and has declined steadily as consumers switched to broadband. In the third quarter, AOL had 5.4 million dial-up subscribers, who paid an average of $18.54 per month.

Even with the decline, this business brought in $332 million during the quarter, or 43 percent of AOL’s total revenue. But that’s down from $1.8 billion, or 82 percent of revenue, during its peak quarter seven years earlier.

AOL has tried to offset the fading service by moving away from its origins as a “walled garden” with subscriber-only content to a network of online destinations with free material, supported by ads. AOL even began giving away AOL.com e-mail accounts.

The results have been mixed. After initially showing promise, AOL’s ad revenue fell last year and in each of the first three quarters of this year. Another problem: AOL’s more than 80 Web sites are struggling to keep their viewers. By contrast, Google and Yahoo both showed gains.

AOL has responded partly with plans to shed up to 2,500 jobs, or more than a third of its employees, in an effort to save $300 million a year. That comes on top of thousands of other cuts in recent years and will leave the company at less than a quarter the size it was at its peak in 2004. The cost-cutting has allowed AOL to stay profitable despite shrinking revenue.

AOL also is trying to produce online material far more cheaply. It plans to launch dozens of new sites next year and populate much of them with work done by freelancers. These freelancers will be paid by the post- some with a flat rate, some with a share of revenue based on the amount of traffic the post generates.

Ned May, an analyst with Outsell Inc, believes AOL can use this low-cost method to experiment with building lots of new sites and see what sticks with viewers. To stimulate the process, AOL is counting on a content-management system it calls Seed. It shows information about the kinds of things people are searching for online so that writers and editors can quickly create material people presumably want to read.

Gabelli & Co analyst Christopher Marangi believes AOL will have to figure out how to better integrate social networking into its sites.  AOL owns a social site called Bebo, which is popular overseas but gets about 6 percent as many visitors as Facebook does in the US, according to comScore data.

Being its own company again means AOL will regain the freedom to use its resources solely for its own benefit, rather than worrying about how they fit into the Time Warner empire. If the stock performs well, it could become a currency AOL can use to snag employees and acquire other companies.

Of course, now the world also will be able to more closely follow whether AOL is making progress on its strategy. “That may be a challenge,” Armstrong said, “but I think it’s a challenge we knew we were signing up for whether we were public or private.”