Change Is Tough, but Necessary, AOL Chief Says

By Frank Ahrens

Monday, October 22, 2007

When AOL chief executive Randy Falco was the No. 2 at NBC for all those years, he liked to call himself "the conductor": He made the trains run on time.

He still makes the trains run in his new job. But for 750 AOL employees let go last week, the trains run one way only — straight out of the company's Dulles campus.

Falco, 53, took over AOL from ousted chief executive Jonathan Miller in November of last year. It's been a busy 11 months.

In December, Falco laid off 450 workers after initially saying that he did not anticipate layoffs. In the following months, he purchased several advertising-related companies, adding employees, and announced that he will move AOL's headquarters, the longtime cornerstone of Washington's tech community, to New York. And on Tuesday, he dismissed some 2,000 more AOL employees, including 750 at Dulles.

"It's hard for employees to grasp everything we're trying to do; it's hard on everyone," Falco said during an interview Thursday. "But it's necessary if there's going to be an AOL in the future."

Before Falco arrived, Miller sought to remake AOL by converting it from a dial-up Internet service provider into a free, advertising-supported content portal. He willingly shed millions of dial-up Internet subscribers, betting that advertisers would make up the losses and tried to create a broad content, e-mail and instant-messaging system. In some ways, he was the Mikhail Gorbachev of AOL — a threshold between the new and the old and, as such, an inevitable casualty. Ad revenue soared but not enough to suit Time Warner, AOL's parent.

Falco is trying to radically and rapidly morph AOL into a global Internet advertising company, one that seeks to compete with Google and Yahoo. He sees AOL as having three components: Publishing, which includes popular AOL sites such as AOL TV; Platform A, the new umbrella for the Web ad firms that AOL has assembled; and the dial-up Internet access business, the foundation of AOL, which has 10 million subscribers, down from a high of 27 million subscribers in 2002.

Platform A is designed to deliver advertisements to a range of nontraditional Internet sites, such as Facebook, where users are increasingly clustering and that have been out of advertisers' reach. Platform A and the publishing division of AOL will "travel together," Falco said, which suggests they may be moving somewhere.

Much speculation has centered on whether Time Warner will spin off AOL. But that may be the wrong question. The right question may be: Will Falco split the dial-up business from Platform A and the publishing division? Falco acknowledged as a possibility that AOL's dial-up business may be sold someday to a company that already runs a dial-up Internet access business. Now that Falco is moving the AOL headquarters to New York, along with advertising and programming departments, Dulles will return almost exclusively to its original form: a dial-up business, which still has 3,250 employees.

Further, he added, there is a home for fellow-travelers Platform A and the publishing division within Time Warner — so that portion of AOL may not spin off.

Falco thinks differently about the publishing side of the house than did his predecessor. Miller, for instance, once put on a Foo Fighters show at a Washington club and broadcast it on AOL to try to entice dial-up subscribers to switch to AOL high-speed Internet.

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Outside of AOL's Dulles office in 2004. (FILE PHOTO) (Joe Raedle/Getty Images)

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In April 2007, AOL President and Chief Operating Officer Ron Grant addressed the media in Bangalore, India. (FILE PHOTO) (Dibyangshu Sarkar/AFP/Getty Images)

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AOL Chairman and CEO Randy Falco speaks during the Reuters Global Technology, Media and Telecoms Summit in New York on May 16, 2007. (FILE PHOTO) (Keith Bedford/Reuters)

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AOL Chairman and CEO Jonathan Miller along with AOL Vice Chairman Ted Leonsis -- who is the majority owner of the Washington Capitals, Washington Mystics and minority owner of the Wizards -- met with The Washington Post to discuss AOL's new business model in 2006. (FILE PHOTO) (Leslie Walker/Washington Post)

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An employee walks through one of the doors inside the lobby of AOL headquarters in November 2004. (FILE PHOTO) (Joe Raedle/Getty Images)

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This 2006 photo shows the annual company volunteer day at AOL headquarters in Dulles. AOL employees packaged more than 2,000 bags for The Red Cross, Loudoun Family Services, Loudoun Literacy Council, and Emmaus Services for the Aging in D. C. (FILE PHOTO) (Tracy A. Woodward)

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YouthAIDS Global Ambassador Ashley Judd spoke to more than 300 America Online employees at the company's headquarters in 2005 to promote HIV/AIDS education and prevention. (FILE PHOTO) (Tim Nguyen/AOL)

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AOL and Advertising.com executives gather at AOL headquarters in 2004 to talk to the media. The companies announced that AOL had agreed to pay $435 million to acquire Advertising.com, a provider of interactive marketing services. In photo, left to right: Advertising.com CEO Scott Ferber; Advertising.com Chief Product Officer John Ferber; AOL Vice Chairman Ted Leonsis; AOL Chairman and CEO Jonathan Miller. (FILE PHOTO) (Rick Kozack for AOL)

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The photo for this illustration was taken in New York in 2006. Here, a collection of compact disks containing promotional software for AOL's Internet service is shown. (FILE PHOTO) (Mark Lennihan/Associated Press)

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In 2003, then-Virginia Gov. Mark Warner speaks during gathering at AOL headquarters in Dulles prior to the ceremonial signing of an anti-spam bill. Shown listening to Warner is, from left: AOL executive Ted Leonsis; president of the Northern Virginia Technology Council, Bobbie Kilberg; Virginia Attorney General Jerry Kilgore and Virginia State Rep. Jeannemarie Devolites. (FILE PHOTO) (Rich Lipski)

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This 2002 photo shows the outside of AOL headquarters in Dulles. (FILE PHOTO) (Kenneth Lambert/Associated Press)

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In this Dec. 11, 2001 photo, Robert Pittman, chief operating officer of AOL Time Warner, presents his keynote address to Internet World Fall 2001 at New York's Javits Convention Center. (FILE PHOTO) (Richard Drew/Associated Press)

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This photo taken Feb. 29, 2000, shows AOL Chairman and CEO Stephen Case, left, and Time Warner Chairman and CEO Gerald Levin as they prepare to testify before the Senate Judiciary Committee in Washington, D.C. about the merger of AOL and Time Warner. (FILE PHOTO) (Mario Tama/AFP)

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AOL CEO Gerald Levin is shown speaking before the House Commerce Telecommunications Subcommittee in Washington in this September 27, 2000 photo. (FILE PHOTO) (Brendan Mcdermid/Reuters)

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In this 2000 photo, Steve Case, left, Chairman and CEO of America Online, hugs Gerald Levin, Chairman and CEO of Time Warner, following a press conference in New York during which the two companies announced that AOL would buy Time Warner for about $163 billion in stock. At the time, the merger was considered to be the biggest business deal in history. (FILE PHOTO) (Mike Segar/Reuters)

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This 1999 photo shows James V. Kimsey, founding CEO and Chairman Emeritus of America Online. (FILE PHOTO) (Philip Bermingham Photography)

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In this March 13, 1995 photo, Microsoft CEO Bill Gates, left, and America Online CEO Steve Case address the Microsoft Professional Conference for the Internet. (FILE PHOTO) (Lou Dematteis/Reuters)

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Signs inside the lobby of AOL's Dulles headquarters are seen in this 2004 photo. (FILE PHOTO) (Joe Raedle/Getty Images)

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The lobby inside AOL's headquarters is seen in Dulles. The firm, which is owned by media giant Time Warner, has seen its number of subscribers shrink in recent years amid fierce competition. (Joe Raedle/Getty Images)

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Falco says AOL's best chance to thrive is by helping people find Internet content, especially user-generated video.

"If by content-creation, [you] mean we're going to go a Hollywood studio and ask traditional media people to begin to create for us special programming, we're definitely not in that business," Falco said.

Falco spoke Thursday in his New York office, a temporary space in the Time Warner building that shares the ninth floor with Time Warner's tax division and a print shop. By April, he said, AOL should be in its new headquarters on lower Broadway, in Greenwich Village, which he described as "a hot, cool place for young people to be." The shop will house about 400 employees initially, Falco said, and some will be moved from Dulles.

Falco is a three-decade veteran adman and operations executive. But this is his first time in the big chair, and he's still learning how to navigate the job's perks. He said he typically spends Monday through Thursday in Dulles and flies to New York on Thursday night on a company jet, which lands at the Teterboro Airport in New Jersey, across the river from Manhattan. But at least five times, Falco acknowledged, he diverted the jet to the White Plains, N.Y., airport, closer to his home. He stopped rerouting the jet because he felt bad inconveniencing the other passengers, he said.

He is trying to adjust not only to the speed of change in the industry he's learning — faster than he anticipated — but also to the blowback from disgruntled, laid-off employees — nastier than he expected.

For an analogy to explain and justify the layoffs, which will account for 20 percent of AOL's workforce, Falco reached back to his old industry.

"It's as if I were to go to HBO tomorrow and say, 'You guys, you're not in the subscription business anymore, you're going to be in the advertising business,' " Falco said Thursday. "You almost couldn't run HBO with the same people."

Still, one of the dangers in laying off smart, motivated, creative computer-literates with access to the Internet is that they have plenty of ways to express their displeasure.

One Web site has posted T-shirt designs acidly touting the "AOL Annual Layoffs 2007," some of which show a bloody knife or feature Falco's picture and attribute fictional, and foul-mouthed, quotes to him. Others steal an image from "The Simpsons," showing two characters: Evil nuclear power plant owner Mr. Burns and his younger, sycophantic lackey, Smithers. This is meant to jab at Falco and his youthful chief operating officer, Ron Grant. Falco and Grant are so close, some within the company have taken to calling them "Rondy."

Falco hired Grant, 41, from Time Warner to run AOL's day-to-day operations. He and Falco engineered a plan to revamp AOL's search function that led to the company to missing its second-quarter earnings numbers by about $20 million. But it's a hit Falco said he knew he would take and that his supervisor — Time Warner president Jeffrey L. Bewkes — knew was coming.

Falco said AOL expected advertising revenue growth in the second quarter of about 20 or 21 percent. When the second-quarter earnings were released, it ended up being 16 percent. That four- or five-percentage point difference was $20 million, Falco said. "That was the 'miss,' which is not a gigantic miss."

Some analysts have written that they do not expect AOL's revenue to climb in 2008, and Time Warner chief executive Richard Parsons said the turnaround will take at least six more months.

"They're changing the business model, and it's not surprising to see revenues go down," said one former AOL executive who spoke on condition of anonymity because he may have future dealings with the company. "Less revenue means you need less people, but that reasoning hasn't been communicated well to people there," the executive said, adding that the mood at the Dulles campus is "raw."

After nearly a year at AOL, Falco knows he may never win over hard-core techies.

"I'm not from this industry, but I'm at least from the media," Falco said. "And I certainly understand advertising — it's the same money we're all vying for here."

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