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ANNALS OF COMMUNICATION
The New Yorker - January 24, 2011
YOU'VE GOT NEWS
Can Tim Armstrong save AOL?
BY KEN AULETTA
In the past three years, newspaper circulation and advertising revenues have plummeted, a fourth of all newsroom employees have been laid off or have accepted buyouts, and more than a hundred free local papers have folded. During these unhappy times for the profession, a surprising savior has appeared: America Online. In the past year, AOL has hired nine hundred journalists, and each week it hires forty more. The new employees include alumni of the
Times, the Wall Street Journal, National Journal, and USA Today. Other recruits are recent graduates of journalism schools, like Columbia’s, that used to send alumni to regional newspapers that no longer exist.
This surge in activity is even more noteworthy given AOL’s dismal decade. In the late nineties, the company built a business connecting people to the Internet over their phone lines and then giving them a place to check their e-mail, chat with friends, and scan the news. Roughly half of everyone logging on to the Internet did so through AOL. In 2000, the company bought Time Warner, in what was the biggest corporate merger in history. But soon thereafter people started getting faster Internet access through cable or DSL connections already built into their homes, the merger soured, and AOL’s business collapsed. In 2002, the company had thirty-five million subscribers; today, there are just over four million, and the number continues to decrease.
The company still gets eighty per cent of its profits from subscribers, many of whom are older people who have cable or DSL service but don’t realize that they need not pay an additional twenty-five dollars a month to get online and check their e-mail. “The dirty little secret,” a former AOL executive says, “is that seventy-five per cent of the people who subscribe to AOL’s dial-up service don’t need it.” But AOL also runs several popular service sites, like Instant Messaging, MapQuest, and Moviefone. According to the company’s newest C.E.O., Tim Armstrong, the most important part of AOL is the collection of blogs and news sites that it manages: DailyFinance, Engadget, FanHouse, Politics Daily, PopEater, and about ninety others. At the center of this media empire is AOL.com, the company’s home page, which provides links to these sites and which receives more than thirty-six million unique visitors every month.
Many companies publish content online, but Armstrong, who is forty years old, thinks that AOL can develop a reputation as a place where reporters and editors craft original stories. The Internet is chaotic, messy, and full of garbage, he says—and AOL can be a helpful filter. He talks enthusiastically about users opening their browsers and going to an uncluttered AOL.com home page, where they will find everything they want to read: from news about the flood in Australia and outlet moncler in Italy and Verizon’s iPhone to gossip about the Kardashians and tips on cooking Chicken Marsala.
Two efforts are central to AOL’s success. The first is to revitalize its home page. This past summer, Armstrong launched a redesign effort and conducted daily meetings to make the page more alluring. “Is this the fastest place in the world to get news and entertainment?” he said, admonishing a roomful of executives. The home page, he told them, feels “like an Internet company designed it. I want it to feel more friendly.” The new home page débuted in November.
The second is to invest heavily in local news. “Local is the one area of the Internet that has not been built out in an extensive way,” Armstrong said last spring. “We believe it’s an untapped market, for the most part, and one of the largest commercial opportunities online that have yet to be won.”
AOL’s local effort is called Patch, a compendium of online newspapers that target small, affluent communities and are supported by advertising. Each paper offers a calendar of after-school activities and planning-board meetings, links to stories about breaking news, and a scrolling Twitter feed that includes information on traffic accidents, police logs, and ongoing crafts sales. There are now seven hundred Patch sites operating in nineteen states and the District of Columbia. AOL chooses new locations based on an algorithm that examines fifty-nine factors, including potential advertising revenue, income, voter turnout, and retail spending. Each Patch site is run by a journalist, who earns between forty and fifty thousand dollars a year. There are no offices; reporters live in the area they cover. Because there are no newsprint or shipping costs, AOL publishes news, Armstrong says, at approximately four per cent of what it costs a traditional local newspaper to do so. Still, the sites are not making money yet. “We will be the largest publisher of local news in the U.S. this year,” Armstrong predicts.
They might not, however, be the best. The sites aspire to break news, and occasionally they do. The Darien Patch, for example, reported that a First Selectman candidate had a criminal record. But often the sites are like digital Yellow Pages, promotional bulletin boards accompanied by news about all the fun things going on nearby. Quality varies widely, and one senses a tension between journalism, which often conveys uncomfortable news, and boosterism, which makes everyone feel good about the home town.
Quality is a problem for the entire AOL media empire. The company has hired many talented journalists, and some of the niche Web sites, like Engadget, publish content that particular readers love. Much of what AOL publishes, though, is piffle. On a typical day in January, its home page included a substantive story about the recovery of Representative Gabrielle Giffords after she was wounded in an assassination attempt in Tucson. But there were many more pieces with headlines like “KATIE AND TOM MAY BOYCOTT OSCARS,” “CURLED LASHES WITH NO MASCARA AT ALL,” and “VIDEOS: HILARIOUS PETS.”
In 1996, David Foster Wallace described the Internet as a place where “there are four trillion bits coming at you, 99 percent of them are shit, and it’s too much work to do triage to decide. So it’s very clear, very soon there’s gonna be an economic niche opening up for gatekeepers. . . . Because otherwise we’re gonna spend 95 percent of our time body-surfing through shit.”
Fifteen years later, there is still a need for the kind of filter that Armstrong says he wants to provide. If he can do it, the company may well be able to thrive as it continues to lose subscribers. It seems unlikely, however, that AOL will survive if it’s just creating new places to bodysurf.
After graduating from Connecticut College, where he majored in economics and sociology, Armstrong went to work at a mutual-fund company, but he quit after six months. For career direction, he cold-called senior business executives who he hoped might serve as mentors. None responded. One executive assistant told him, “The only way you’ll get through is if you’re a reporter, or if you know someone they know.”
“So I decided to start a newspaper,” Armstrong says. In late 1993, at the age of twenty-two, he and a friend from high school, Michael Dressler, sold their mountain bikes, racked up about a hundred thousand dollars in debt, and produced a tabloid-size newspaper called BIB (Beginnings in Boston). The paper was a tip sheet for college-age students and other people just entering the workforce. Armstrong and Dressler interviewed executives, who gave advice and told stories about how they had become successful. Suddenly, the higher-ups started returning calls, volunteering guidance, and offering the names of friends to contact.
Near the end of 1994, the owner of the Square Deal, a larger, rival newspaper, died. There was no obvious successor, and his widow called Armstrong. “My husband would have wanted you to run his newspaper,” she told him. He and Dressler were given partial ownership of the paper, and they moved its offices to Harvard Square and closed down BIB.
Armstrong was interested in a new phenomenon called the Internet, and he wondered if he and Dressler could publish a newspaper online. So he visited the M.I.T. campus to watch a presentation of Mosaic’s first browser. He saw that consumers could just click on what they wanted to read, and that advertisers could track users in order to target ads more precisely. “On the spot, I said, ‘I’m doing this,’ ” he recalled. “ ‘This is going to be huge.’ ”
Dressler wanted to enter the sports business, so they sold the Square Deal. Armstrong went to work as an ad-sales director for I-Way, which he describes as “the first Internet magazine for consumers.” He proved to be a persuasive ad salesman and was soon promoted. Two years later, he switched to a new online entertainment-and-news company, Starwave, which was bought by Disney in 1998. While there, he engineered the first million-dollar online-advertising deal, with the health-care company Columbia/HCA.
Armstrong moved through a series of online publishing jobs. In the summer of 2000, he was working in New York as the vice-president of sales and strategic partnerships at a news-and-gaming company called Snowball. One day, a friend called and told him that Google was considering selling ads to run alongside search results. Its sales and operations chief, Omid Kordestani, would be in New York and wanted to meet Armstrong for an “informational discussion.” They got together at the Regency Hotel and, at the end of their conversation, Kordestani asked Armstrong if he’d fly to California to meet Google’s co-founders, Sergey Brin and Larry Page. They offered him a job as U.S. sales chief, and he accepted after convincing them that he should be stationed in New York.
Armstrong did bold things at Google. At one point, he decided to expose Google’s engineers to the consumer-oriented culture of Procter & Gamble. That company’s chief marketing officer, Jim Stengel, wanted his staff to learn about digital technology. So they agreed to exchange employees for a few weeks at a time. Armstrong’s main accomplishment was to build a direct-sales force of more than a thousand employees, who worked with advertisers and their agencies. Most of the company’s revenues were generated by the small text ads that appear when it answers search queries on Google.com. But Armstrong helped convince Google that much of its future revenue would come from people who could sell large display ads on other sites in the company’s empire, like YouTube. He “literally built the entire direct sales force” at Google, the company’s C.E.O., Eric Schmidt, wrote in an e-mail. “He is a genuinely fun and charismatic leader, people just like to be with him and listen to him. He is among the best and most inspirational sales managers I have ever worked with.”
While he was at Google, Armstrong had his revelation about local news. One Saturday morning in 2007, he and his three young children were driving home from a bagel store half a mile from their home, in Riverside, Connecticut. At a stoplight, they pulled over to look at the hand-lettered signs that residents had stuck in the grass to advertise local events. There was no online listing of events in Riverside, and the Greenwich Time lacked a calendar. Armstrong called the newspaper and introduced himself as a resident and told an editor that the paper was missing out on a terrific business opportunity.
“We don’t really need any help. We have a fine business,” the editor told him, before saying thanks and hanging up.
This was crazy, Armstrong recalls thinking. He lived in one of the wealthiest towns in America, yet he had to drive to a stoplight to find out what to do with his family.
Google had made him extremely wealthy, and he had the means to address this problem. With the help of a close friend, Jon Brod, who had been running his private investment company, he launched Patch as a small side project, with the first pages opening in three communities in northern New Jersey. After coming to AOL, he had the company buy Patch—forgoing any personal profits—and brought Brod in to run it.
Google’s ad sales soared under Armstrong, as did his reputation. In the winter of 2009, Jeff Bewkes, the C.E.O. of Time Warner, invited Armstrong to his eleventh-floor office at the Time Warner Center. Bewkes had been a senior Time Warner executive, and one of the few open dissenters, when the company agreed to merge with AOL. He had had a hand in hiring and firing a series of C.E.O.s, and he was desperate to rejuvenate AOL—or to spin it off as a private company. Bewkes told Armstrong that he’d like him to come to AOL as the chairman and C.E.O. He thought that Armstrong could regain the confidence of Wall Street, Silicon Valley, and advertisers.
Bewkes was essentially asking Armstrong to leave the most successful technology company of the past decade to run one of the least successful. Bewkes knew that Armstrong had made his fortune. He was the president of a division and, as a non-engineer in an engineer-centered company, there wasn’t much room for him to advance. Perhaps he could turn AOL around, as Steve Jobs had done at Apple and Louis Gerstner had at I.B.M. A few weeks after the meeting, Armstrong took the job. He was AOL’s fifth C.E.O. in a decade.
When most people leave Google, their departure is marked with a memo. When Armstrong left, the company prepared a farewell slide show, which was half toast and half roast. Randy Meech, who worked with him at Google and is now the chief engineer for all local AOL sites, says, “We all assumed Tim would one day run for President.”
AOL announced Armstrong’s appointment on March 12, 2009, and he set off on a listening tour during which he met with employees in sixteen cities in the U.S. and abroad. During his visit to Dulles, Virginia, a thousand AOL staffers crowded into a tent to hear from their new C.E.O. He walked onstage with his jacket unbuttoned and the knot of his yellow tie not quite pulled up to his shirt collar. He stands six feet four, and has a full head of wavy black hair, high cheekbones, and large front teeth. Although he limped slightly from an old hip injury, he exuded a sense of command. “Are you guys committed to putting America back online?” he bellowed. “Don’t worry about Wall Street. Don’t worry about the press. Worry about building great products.” Team AOL cheered. “It felt like a revival meeting,” said Jeff Levick, an executive who followed Armstrong from Google to become the president of global advertising and strategy at AOL.
When Armstrong moved into his new company’s headquarters, in the Wanamaker Building, on East Ninth Street in Manhattan, he took down the walls around his corner office. Eventually, the former department store came to resemble the offices of Google, with bright colors and open spaces.
He was astonished to discover, though, that many of his employees kept hours typical of professors. AOL, like Time Warner, enjoyed summer Fridays, when people would leave for the weekend at noon, if not earlier. He terminated the perk immediately. Although AOL’s employees acquiesced, and made it clear that they were ready for a savior, Armstrong felt that he had joined “a defeated culture.” On the Monday morning of his third week, he read online that AOL’s e-mail service, which once ranked No. 1, had fallen to fourth place, behind Google’s Gmail. He thought that his employees would be chastened and, therefore, motivated by the news. “I waited all day to see if someone would bring it up,” he recalls. “No one did.” At a Friday gathering of the AOL executive team, Armstrong asked everyone at the table what was new to report. Again, no one said anything about e-mail. He finally explained what had happened and yelled, “We should have held red-alert meetings!”
After conducting focus-group research on the value of the brand and talking with hundreds of employees and advertisers, Armstrong gradually settled on a strategy. He would rebrand AOL as a content company, and label its original material so that visitors would know that the company was not just another collector of unpaid bloggers recycling other people’s news. He would slash the number of ads featured on AOL.com, convinced that large advertisers would relish the exclusivity.
He also decided to direct more of the company’s focus toward women, whose interests and needs, he believes, are not well served by the rest of the Web. When AOL started redesigning its blogs, it began with the women’s sites, like StyleList.com, AOL Shopping, and KitchenDaily.com. Nearly sixty per cent of all visitors to Patch are women. On the company page describing its demographics for the sake of advertisers, the first two categories mentioned are “women” and “moms.”
While making these changes, Armstrong brought no executives with journalistic experience into his inner circle. As a result of this, perhaps, AOL relies far more on technology than traditional news-gathering organizations do. David Eun, who came from Google and, as president of AOL Media and Studios, coördinates all of AOL’s non-local content, says, “The front page of AOL should look less like the New York Times than the front page of Amazon.com. What you get and what I get should not be the same.” Just as Amazon recommends books based on previous purchases, AOL will allow you to rate stories and will recommend ones based on what you’ve read and enjoyed. Visitors interested in, say, health issues will see more pieces about the F.D.A.
The company has also designed a system called Seed, a hybrid of journalism and engineering that is run by Saul Hansell, who came from the Times after seventeen years as a technology and finance reporter. Seed is based on the idea that editors can figure out what stories to assign by mining data from search engines like Google and social networks like Facebook. If algorithms can tell you what people are talking about, and what they’re searching for, then you know what they want to read.
With a staff of about twenty-five, Seed produces print and video stories for various AOL sites. An online database lists each idea that the editors and the algorithms come up with, along with a deadline, a proposed length, and a proposed fee, which is usually less than a hundred dollars. Thousands of freelancers have signed up to write these stories. The company’s hope, Hansell says, is that the technology “is going to give people access to thoughtfully produced reporting on far more subjects than traditional journalism methods ever provided.” Knowing what interests people, and what questions they have, “helps us be better journalists,” Hansell says. For now, the results are not heavy on investigations or stories about Yemen. One day in January, pending Seed assignments included “Confessions of a Personal Assistant,” “Insane Customer Service Calls: They Called About WHAT?,” and “I Interviewed at Google.”
The writing, too, is often designed to appeal more to search engines than to readers. In the list of “contributor resources” for Seed, the most prominent category is for “search engine optimization”—S.E.O.—the process of packing stories with words that will make them appear higher in the list of results that Google and Bing display when users search for terms related to the subject. Seed links to guidelines that instruct writers to pay attention to what is called “keyword density”: the number of times that certain phrases appear in a story as a percentage of the total words in a piece. If you’re writing a story on herbal tea, you should use that phrase early and often.
The idea of targeting a story for search bots infuriates some journalists. But AOL points out that it hasn’t gone nearly as far as some of its rivals. A company called Demand Media publishes six thousand stories a day by freelancers. Its founder, Richard Rosenblatt, has boasted that the assignments are all based on algorithms. Demand Media is profitable, but, unlike the executives at AOL, Rosenblatt does not associate his company with journalism; he says that he and his company are “content enablers.” Often, the stories are hard to distinguish from spam.
Although David Eun has vowed to hire an editor-in-chief to impose standards, AOL has not yet done so. Some journalists doubt that the experiment and the over-all approach to journalism at AOL will end well. Jeff Bercovici left the company in late September to join Forbes.com, partly, he says, because being at Forbes would “help me get my calls returned,” and also because “people at AOL are looking for fast results to counter the downward trend lines.” A reporter at AOL says that there is tension between the writers and the executives, too. “When I started here,” he says, “it was all about getting more page views. Then they decided on a different metric, S.E.O. What they never realized is that you can’t build a real journalistic brand that way.”
Early each morning, Armstrong takes a chauffeur-driven S.U.V. from his home in Greenwich to his office in Greenwich Village. There are no newspapers on the back seat; he consumes his news online. He says that he spends about twenty minutes scanning “the major newspapers” and Web pages like the technology news outlet All Things D, and another twenty minutes skipping among the various AOL sites.
Armstrong listens intently, rarely raises his voice, and is generous with compliments. He commands attention when he speaks, even when it’s not clear exactly what he’s saying. Like many salesmen, he has an affinity for catchy slogans: AOL is on a mission to “beat the Internet,” and is engaged in a “start-around.” He says that his big idea for AOL is to “put people back in charge of the Internet. Silicon Valley creates things where users have to work. AOL will do the work for consumers.” His company should be thought of as full of helpful “elves.” Armstrong offers something between a vision and a sales pitch.
Armstrong presses his strategy in meetings that take place around a long table in a large, glass-walled conference room several yards from his desk. The seats are generally filled when he arrives, with his laptop in one hand and his iPhone in the other. He urges the executives present to be candid. In a business review meeting this past summer about operations in Europe, for example, he said, “If you don’t say it in this meeting, don’t say it after.” He asks many questions, and he can be tough, as one AOL executive learned when he recommended that the company jettison its failing European divisions. “You’re thinking too small,” Armstrong told him. “We need to be a global brand.” Armstrong soon relieved him of his job by politely telling him, the executive recalls, “I need to bring in my own team.”
Even after being fired, though, the ex-employee speaks well of Armstrong, and there are executives outside the company who want to hire him. This fall, private-equity investors furiously tried to manufacture an AOL takeover of Yahoo. The deal made no sense: AOL is a tenth the size of its rival. But it seemed to have been instigated by Yahoo investors who were eager to find a way to get Armstrong to replace Yahoo’s C.E.O., Carol Bartz. AOL executives also quietly touted the deal and whispered that they could save a billion dollars by merging the two portals. It was obvious, though, that their enthusiasm stemmed in part from the fear that AOL’s new strategy may fail. Those doubts aren’t unwarranted. Despite his galvanizing leadership qualities, Tim Armstrong has yet to find significant success at AOL.
In 2010, Armstrong nonetheless began to boast of “the AOL turnaround.” In his first year and a half as C.E.O., he had reached an agreement with Time Warner to spin off AOL as a privately traded company on the New York Stock Exchange; restructured and cut another third of AOL’s workforce; and streamlined the company’s home page and slashed the number of ads featured most days, from fifteen to one. This would crimp short-term revenues, he knew, but it would make AOL more user-friendly and allow it to sell ads at premium rates. He had negotiated an agreement with Google that kept his old company as the default search engine on AOL. He had got rid of AOL assets that Time Warner overpaid for, including the social-networking site Bebo, which Armstrong sold in 2010 for approximately ten million dollars, an eightieth of its cost.
AOL was also acquiring. In one week in September, the company announced that it had bought an online video company (5min Media), a Web software company (Thing Labs), and a prominent blog, TechCrunch. He had overhauled the company—by the fall of 2010, every senior executive reporting to Armstrong was new to his job—and impressed advertisers. “With Tim’s arrival and the team he brought with him, we have leadership that is much more sensitive to what it takes to be successful in the advertising marketplace,” Irwin Gotlieb, the C.E.O. of GroupM, the country’s largest media-buying agency, said.
Still, between 2008 and 2009 AOL’s revenues dropped twenty-two per cent, to just under $3.3 billion; the number of its domestic subscribers plunged by twenty-seven per cent. Although AOL’s net profits rose to two hundred and forty-nine million dollars last year, Armstrong concedes that most of its profits flow from that melting subscriber base. While many year-end 2009 analyst reports praised the management team that Armstrong has assembled, they did not ignore AOL’s difficulties. “Of the different turnaround stories in the ’Net sector today,” Citi analysts wrote, “AOL is probably the toughest.”
AOL’s numbers did not improve in the first nine months of 2010. While the advertising revenues of most Internet companies rose, at AOL they dropped. On August 4th, Armstrong admitted to analysts that AOL was “a sick patient.” The company’s third-quarter earnings report, which was released on November 3rd, revealed a continued slide in revenues, earnings, and subscribers. Many analysts have begun to question the prospects for the “new” AOL.
Armstrong predicts that the company’s health will show marked improvement in the second half of 2011, but there are few signs of that happening. The problem begins with the fact that Armstrong’s vision isn’t entirely new. AOL has fitfully pursued a “content” strategy since 2006, as an S.E.C. report filed by Armstrong in 2009 acknowledged. In fact, most of Armstrong’s turnaround strategy—make the site cleaner, add local news, create unique content, make AOL a destination portal—is based on ideas from the Internet’s past. Relying on Web advertising was a promising business idea ten years ago, when advertising rates appeared destined to climb endlessly higher as it became possible to target ads precisely for narrower groups of consumers. (Your Web history tells me that you like to run, and that you live in New York; here’s an ad for a sale at the local shoe store!) But Web advertising rates have decreased in recent years, since demand (the number of Web pages) vastly outpaces supply (the number of advertisers). True, high-speed Internet connections allow the kind of video ads that are featured on television. And it is possible to run a profitable business supported by Web advertising, as Google, Yahoo, and Facebook have shown. But Web businesses have come to realize—as online newspapers and magazines have—that they need a second revenue source, whether it is e-commerce or paid subscribers.
As AOL struggles with old stuff, its competitors are pushing ahead with new stuff. In the past two years, Apple has released the iPad and built a lucrative App Store; Google introduced the Android mobile operating system and has begun charging people for pay-per-view on YouTube; Facebook has generated hundreds of millions of dollars through video games and formed deep partnerships with everyone from Pandora to the Times. Meanwhile, AOL increasingly relies on content that advertisers have generally spurned. It may also be the case that young Internet users don’t require AOL elves to help them navigate the Internet. Older users who do need guides are not the people most advertisers want to reach.
Clearly, consumers today want local news, and print newspapers that have said their growth depends on that strategy have often been done in by the expense of paper, presses, and trucking. But hiring hundreds of journalists isn’t cheap, either, and Patch is costing AOL about thirty million dollars each quarter. There are also many other online news sites that are intent on providing more local coverage. In some cities in Connecticut, for example, Patch competes with a company called Mainstreet Connect, which is trying to do much the same thing.
Other portals offer an array of content. All vie for advertising, talent, and the attention of consumers. While AOL—like Yahoo and the Huffington Post—boasts of the original journalism it produces, it doesn’t employ a single overseas correspondent. By contrast, the Times says that it spends seven million dollars a year to produce news from Iraq and Afghanistan alone. If Politics Daily is better than Demand Media, it’s not as good as Politico. AOL does not seem to be saving journalism, and journalism does not yet seem to be saving AOL.
As Steve Jobs and Apple showed in the nineties, tech companies can survive and prosper after near-death experiences. Perhaps Tim Armstrong will manage to make AOL rise again, but there’s a much more common path followed by digital companies—like Wang, DEC, Starwave, Excite, and Lycos. They rise, then they sputter, and then they crash.