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Who would want to lead AOL?

The search is on for the person willing to bail water at America Online. And it could be a long, difficult search as candidates examine the woes afflicting the online giant.

Jim Hu Staff Writer, CNET News.com
Jim Hu
covers home broadband services and the Net's portal giants.
Jim Hu
5 min read
Message to the new chief of America Online: You've got a mess.

On Thursday, Robert Pittman resigned as chief executive officer of the embattled online division, the latest evidence that the titanic $165 billion union of America Online and Time Warner has hit an iceberg.

Some of Pittman's duties were picked up by two company veterans, but the search is on for the person willing to bail water at America Online. And it could be a long, difficult search as candidates examine the woes afflicting the online giant. After all, Pittman himself assumed the top job just a few months ago.

After former CEO Barry Schuler stepped down in April, Pittman was sent from AOL Time Warner's New York office to AOL's Dulles, Va., headquarters. While Pittman's mission was temporary, other executives within AOL Time Warner were approached to take over, according to reports. None accepted, so the search has broadened to outside the company, as evidenced by the company's recent confirmation that it hired executive search firm Spencer Stuart.

"What you really need is somebody who can make AOL more compatible culturally with Time Warner, which has proven to be the sticking point at the company forever," said David Simons, managing director of institutional research firm Digital Video Investments, who has followed AOL and the former Time Warner for more than 10 years.

Among the issues confronting AOL's new chief are withering public scrutiny, skeptical investors, a brutal advertising market, and a politically polarized corporate structure.


• After a year of executives denying AOL was susceptible to the dot-com bust, the division last quarter posted its second consecutive period of double-digit declining ad revenue (when ads bought by other divisions within the company were factored out). Recent reports have charged that AOL improperly accounted for advertising revenue and withheld information about the extent of the decline--charges the company disputes.

• Since early this year, Wall Street has raised flags over AOL's slower subscriber growth and its overdependence on giving away free minutes to potential members.

• As the online advertising environment continues to contract, AOL's new CEO will need to find other sources of revenue. At the beginning of 2001 executives--including Pittman--continued to tout AOL as "recession proof." But it's clear the company needs to diversify its revenues.

• Microsoft, AOL's old nemesis, remains a threat. After eight years of birth and rebirth, MSN's subscription numbers continue to substantially lag behind AOL's. But with the release of MSN 8.0 this fall, AOL faces a refurbished service that has many tie-ins with Microsoft's shrink-wrapped software. As of March, AOL had 34 million subscribers, having added 800,000 during the quarter. By comparison, between January and April of last year, AOL added 2 million subscribers. MSN has 8 million.

• Time Warner's "old guard" appears to have taken its revenge over the younger, brasher AOL veterans who marched into Rockefeller Center ready to rumble. Today, few of them remain in the corner offices and the AOL division has become just another cog in a sprawling empire. Division heads blame AOL for the company's plummeting stock price.

• Investors are likely to keep AOL Time Warner at arm's length for quite a while. Despite the great promises that executives made about the merger, the stock has plunged 71 percent in the past year.

Despite the problems, AOL could be considered a victim of irrational expectations. Last quarter, the division generated more revenue than any other, reaching $2.3 billion. Earnings before interest, taxes, depreciation and amortization remain the second highest in the company after Time Warner Cable, reaching $433 million last quarter.

"To say AOL is a lousy business is ridiculous," Digital Video's Simons said. "This company is still bringing in good money and good margins."

Nebulous corporate climate
Sources in the company describe the mood as both cathartic and anxious. On one hand, the uncertainty over who is in charge has been answered.

But more painful changes may be in the works, as employees fear more layoffs and an uncertainty about the culture once the new regime is firmly in place.

"They're nervous about new management--'will they understand us?'" one former AOL employee said in describing what other employees have told him. "It seems to me that it's almost as if the merger is just beginning again in terms of people, management and structure. Especially since it's being seeded with Time Warner people."

Still, there are signs that AOL's priorities are retreating to its foundation of product development. Sources in the company say years of riding the dot-com boom may have injured the company's core strengths of creating better services.

AOL in May brought back David Gang, a veteran product developer who was instrumental in creating AOL Instant Messenger, as its executive vice president of product marketing.

Meanwhile, other stars in the company are shining brighter, most notably Kevin Conroy, the former BMG music executive who runs AOL Music. Conroy, whose AOL Music has been lauded for its popularity and experimentation, is being promoted to oversee all of AOL's online entertainment programming.

"AOL's strength has always been in marketing and ease of functionality, and we believe that it would behoove them to return to these roots to enable the division to be a driver of broadband and not a victim of it," Paul Kim, an equity analyst at Kaufman Bros., wrote in a note to investors Friday.

Nevertheless, candidates for the CEO spot will wonder whether AOL has reached bottom or still has a ways to go. They may consider the case of Yahoo when searching for the answer.

A year ago, Yahoo was in deep trouble. Feeling the effects of the online advertising collapse, the company in July 2001 watched its revenue plummet to $182.2 million from $272.9 during the same quarter in 2000.

Just months earlier, Yahoo's board of directors passed over insiders and appointed former Warner Bros. studio chief Terry Semel as the new CEO. Semel remained in the shadows for months, opting for silence despite demands from Wall Street and the media for him to articulate his turnaround plan. Meanwhile, the company continued to suffer layoffs, a veteran executive exodus and languishing stock performance.

In November, Semel unveiled his strategy for refurbishing the company. His objectives included growing paid subscribers to 10 million, a 50-50 balancing of advertising and non-advertising revenue, cutting away under-performing divisions, putting more resources into divisions that make non-advertising revenue, and pursuing sensible acquisitions.

Earlier this month, Yahoo appeared to be on track with many of these objectives. The company last week reported its first, albeit slim, profit in six quarters, largely from revenue realized in its acquisition of HotJobs.com and its deal with paid search company Overture Services.

Though not a major factor in putting Yahoo in the black, the company announced a milestone of 1 million paid customers, many from its personals and paid e-mail offerings

Whether the new AOL chief can, uh, Yahoo, remains to be seen.