Time Warner Dumps Albatross AOL

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Tim Armstrong, the former Google ad exec who was hired in March, will run America Online as a separate company.

Tim Armstrong, the former Google ad exec who was hired in March, will run America Online as a separate company.

AOL is on its own again.

As has been expected for months, Time Warner Thursday announced that it is finally divorcing America Online, after nearly a decade of trying to make the marriage work.

Time Warner bought AOL in January 2001 for $164 billion, in hopes of creating a multi-media empire. Instead, the company stock has plunged about 80 percent.

AOL and its 7,000 employees will be spun off as a separate company, run by Tim Armstrong, the former Google ad exec who was hired in March.

The parent company, which owns 95 percent of AOL, said it will buy out Google’s 5 percent  stake during the third quarter. "For AOL, becoming a standalone company will give it more focus and strategic flexibility," Time Warner's chief executive, Jeff Bewkes, said in a statement.

At the time of the merger, AOL was a giant in the budding online industry. It offered dial-up access and its own thriving closed community with news, features, message boards, instant messaging and chat rooms, and it created an easy gateway to the web for the not-so-early adopters. At its peak in 2002, it had nearly 27 million subscribers.

But the arrival of broadband, coupled with the increasingly widespread use of independent browsers — especially Microsoft's Internet Explorer, which came packaged with most new computers — ate away at AOL's prominence.

In the end, the closed community was disbanded, and AOL became, basically, just another portal struggling to attract advertisers and eyeballs.

By the last quarter, AOL was down to just 6.3 million dial-up subscribers. Its operating profit of $150 million in the first quarter marked a 47 percent drop from the same period in 2008.

The company still does have some strengths, however. The dial-up business does generate about half the company’s revenues by offering Internet access to people still without broadband. And it runs a cluster of content sites called MediaGlow, which includes sites AOL has acquired, such as Moviefone and gossip headquarters TMZ, as well as a growing number of original niche sites aimed at taking advantage of the fragmented web audience. 

It also has its own social network, Bebo.com, which it acquired last spring for $850 million. Its Platform-A business places ads on sites all over the web. And now it will be able sell its own stock and raise money.

And while it will be an uphill climb for Armstrong — the company's third CEO since 2006 — even AOL's founder Steve Case has long been in favor of breaking the bond with Time-Warner.

"At a time when some of the fastest-growing enterprises in our economy are Internet leaders — such as Google — shareholders would benefit from seeing AOL return to its roots in the Internet sector," Case wrote in the Washington Post back in 2005.

"The success that Warner Music has had since being spun off from the parent company is an example of how this strategy can deliver value for all stakeholders," he wrote. "When Warner Music was part of Time Warner, it was — much like AOL — seen as a business in decline, a troubled division with a glorious past but a questionable future. But since being separated, Warner Music has increased in value by cutting bureaucracy, signing new artists and investing more aggressively in digital music.

"The private equity firm buyers have already recouped their initial investment, and are still major owners of a stock that is up 20 percent since its initial public offering six months ago."