AOL: Three Decades of Turmoil

AOL: Three Decades of Turmoil2


AOL has gone from fame and glory to hype to trying everything possible simply to survive. Started in 1983 as “Quantum Computer” (Agamawi, 2012), later renamed America Online, the company went public on the NASDAQ in 1992 and proceeded to grow 50,000% in just two year’s time. A genuine blue ocean – disruptive innovation story not unlike future iconoclasts Google, Apple and Tesla, in a 2007 USA Today survey AOL placed fourth behind the invention of the world-wide web, the creation of email, and the development of graphic user interfaces. AOL was also included in the “.com 25” list of influencers in Silicon Valley at the same time (“AOL – Wikipedia, the free encyclopedia,” n.d.).

For many years AOL was not considered a global company, indeed most of its focus, even at its peak, was within the United States. Growth came via membership fees to access an internet portal, enabling search, browsing, email and news. AOL developed partnerships with other media companies to enable their entre into the nascent digital/online mass media market. Two decades later, however, AOL (now Aol.) would describe itself as an American multinational company, developing brands and web sites, distributing digital content, and selling advertising. The pinnacle of AOL as measured by market capitalization came in January 2001, at the time of a controversial and historically the largest merger in corporate history, between AOL and Time Warner. At that point AOL had a market capitalization of $175 billion, higher than IBM, GM and Ford’s valuations combined.

In January 2001 AOL merged with what was widely considered a conservative media company called Time Warner, itself having been built largely through mergers and acquisitions. At the time of the merger, Time Warner was valued at $90 billion, compared to AOL’s $175 billion.5

Interestingly, Time Warner was generating revenue of $27 billion in revenue, was profitable, and had 70,000 employees, while AOL was generating revenue of $5 billion, lacked profitability and had only 15,000 employees, according to Agamawi (2002). AOL acquired Time Warner, recording the transaction as a “purchase” (Verrecchia, 2013). AOL equity was issued to Time Warner shareholders in the amount of $147 billion. Of this amount $127 billion, or 86% of the consideration provided, was recorded as “Goodwill.”

As a result of the dot-com bubble and in particular the high valuation attributable to AOL, much has been written critical of the valuation process as a whole, pointing to the AOL Time Warner merger as the poster child for a complete breakdown in the methodology and approach that should be practiced in order to get reasonable valuation assessments (Barbara & Pluchart, 2013). Other research has found that stock financed takeovers in general, common especially in technology mergers and acquisitions, generally result in significantly inflated assessments of purchase prices (Eckbo, Makaew & Thorburn, 2013).


From the AOL side was needed a durable and profitable company with hard assets that was run well, in order to tackle the problem of their core business which was experiencing a significant decline in “dial up” service demand. From the Time Warner side, management believed they could benefit from access to the digital era through integration with the largest Internet media firm at the time. Both lacked key assets to prosecute their strategies, but believed the merger would solve for that problem. The combination was meant to “tie the knot” between old economy infrastructure and the open content of the new media business and economy (“Analysis of the AOL and Time Warner Merger,” n.d.). The long-term strategy for the merger was to provide users with cable broadband, as well as a wide range of other related broadband technologies. The merger was considered at the time to be the “Deal of the Century,” and advertised as AOL’s “rebranding.” It later would be called the worst deal ever by the erstwhile CEO of Time Warner.

Such was the strategy backdrop, but the global telecommunications industry was not cooperating. Blue ocean threats began to buffet the combined business almost from the outset. One upstart in particular, Google, would go on to all but monopolize user searches and advertising revenue.

Organization culture and leadership

The Time Warner and the AOL cultures have been characterized as “diametrically opposed” (“Analysis of the AOL and Time Warner Merger,” n.d.), their management styles sharply conflicting. Time Warner’s executive leaders were outnumbered by the senior executives from AOL who were young, precocious and seemed to be in a hurry at all times. The disproportionately higher equity in the new company went to AOL shareholders. Studies have shown that when mergers and acquisitions fail, they do so as a result of the poor handling of “change management” (Kansal & Chandani, 2014). Recommendations that researchers agree will help merge different corporate cultures, such as deep cultural learning at the front end (Lee Marks, Mirvis & Ashkenas, 2014), can help reduce future conflict and employee turnover. There is no mention in the literature that anything beyond perfunctory and superficial attention was paid to this important aspect during the AOL Time Warner merger.

One employee of the merged company described having three CEO’s during her AOL Time Warner tenure, each with his own vision, mission and 100-day plan. The “top team” du jour changed often, what was on top today suddenly lost status and a new team was highly esteemed. Her only certainty was that change would continue, change would be a constant, referring to “repetitive change syndrome,” the manifestation of which is “initiative overload” (Abrahamson, 2013).

From the beginning AOL began to show cracks in its business model and reputation, creating further disrespect within the Time Warner leadership ranks. Yamanoi and Sayama (2013) found that cultural integration predicated upon two very different central individuals, in this case Steve Case and Jerry Levin, can result in significantly higher individual turnover, organizational communication breakdowns, and interpersonal conflicts.

As a result of a government inspection, AOL was accused of overstating their 2000-2001 revenue by as much as $1 billion (“Complaint for violation of the securities act of 1933,” 2003) though the case was later settled at a fraction of that amount. The stress on the two Chief Executive Officers, Jerry Levin of Time Warner, and Steve Case of AOL, led both to leave the merged company in December 2001 and early 2003 respectively. Since that time the firm struggled to reduce its debt by selling assets including sports and cable television channels and a book publishing division. A decade later in an interview on CNBC, Jerry Levin admitted he made the “worst deal in a century,” and apologized for the results (Harrington, 2013).4

Competitive environment and market conditions

Global consolidation and the entry of foreign interlopers such as Deutsche Telecom (Germany), as well as Nippon Telephone & Telegraph (Japan) altered the entire industry. Yahoo and MSN began moving well beyond fast follower status into broadband, significantly increasing data transfer speeds, as well as creating unique and appealing home pages, email, news, search and browsing capabilities. The first movers were the telephone companies, all having tremendous in-place infrastructure that AOL initially had sorely lacked. DSL broadband brought to the telephone companies a blue ocean business, leaving “dial-up” and voice telephone calls in the rear-view mirror, and moving huge amounts of digital information through their networks to their installed base of customers.

Blue Ocean Google joined the contest for media content market share, along with MySpace, Fox Interactive Media and Facebook, each with a different primary focus but having in common both “content” and “delivery,” the revenue and profitability coming largely from online advertising. Broadband operators were competing with AOL for Internet subscribers. Internet magazines and new websites were striving with Time Warner’s online magazines such as Fortune and People (“Analysis of the AOL and Time Warner Merger,” n.d.). To make matters even worse, piracy of Time Warner video games, television and films was cannibalizing revenue and profits.

Current growth and new business strategies

On May 7, 2014 AOL announced disappointing financial results, profit slid 64% (Kaufman, 2014). AOL had been spun off as a separate public company (IPO) in 2009 (“AOL,” n.d.). The years from the merger to the spinoff were mostly disappointing. Since most of the consideration had come from an overvalued AOL, much of the strength of the leadership team relied upon AOL. Cultures were markedly different between the two firms. AOL executives, especially AOL CEO Steve Case, had been described as aggressive, wobbly, and moving very quickly (“Analysis of the AOL and Time Warner Merger,” n.d.), whereas Time Warner culture was more refined and cautious.

Tim Armstrong, AOL’s new CEO ever since the IPO, declared the new strategy for AOL would be to lead mechanized advertising sales (Kaufman, 2014). This new strategy included the purchase of Convertro for $100 million, basically an engine for analyzing the purchasing habits of users. In 2013 AOL bought, a company that had developed video advertising.   While this new strategy, along with growth through acquisitions, AOL was finally poised to increase revenue, though profitability would lag for some time. The competition was fierce, and companies such as Google and Facebook dominated the online advertising business by an order of magnitude. Mr. Armstrong said he would continue to the growth strategy, via more acquisitions, especially in the video space. The AOL market capitalization as of September 6, 2014 was approximately $3.8 billion, compared to the valuation of $175 at the time of the AOL merger 13 years ago, a decline of 98%.

Primary business model

Originally, prior to the ill-fated merger with Time Warner, AOL was known for its software suite, or browser, allowing customers to utilize AOL as an internet launching pad into email, search, news and other digital content. At AOL’s peak, membership topped at approximately 126 million worldwide (“AOL – Wikipedia, the free encyclopedia,” n.d.). Subscriptions averaged 25 months, and each subscription generated $350 in revenue for AOL. AOL operated a chat room that allowed groups of people having similar interests to meet online. “Private rooms” held up to 23 people, “conference rooms” and “auditoriums” more. AOL developed dozens of partnerships to increase their online offerings, including the American Federation of Teachers, Discovery Networks National Geographic, Highlights for Kids and many more (“AOL – Wikipedia, the free encyclopedia,” n.d.).

In 1996 AOL changed their hourly fee for chat rooms to a flat $20 per month. This led to a flood of demand that crippled the fledgling company’s computer infrastructure and network, resulting in annoying busy signals. The brand began to suffer and Steve Case himself spoke in a commercial asking for patience as “AOL was working day and night to fix the problems” (“AOL – Wikipedia, the free encyclopedia,” n.d.).

At the time of the merger in 2001 AOL, along with it Time Warner acquisition, sought to create an integrated communication and media company (Agamawi, 2012). Between the time of the merger and up until AOL was spun off as a separate public company May 28, 2009, AOL transitioned into a new phase of “re-branding,” while also experiencing a general decline in its business.

AOL added personalized greetings in 2004 as users accessed basic functions; one year later developed the capability to broadcast live concerts. They launched an anti-virus, anti-spyware, proprietary firewall bundle with McAfee and shortly thereafter began selling diagnostic tools to check security status. AOL began to offer free email accounts in 2006 (80% of members converted within a few months), and embarked on a cost reduction program.

They added many content-rich services such as news, videos and remote backup services. AOL transitioned out of the $26 per month dial up access to $10 per month broadband unlimited access. Beginning in 2007 they began a campaign to acquire several advertising dot-coms. But the decline continued, largely a result of fierce competition from Google, MSN and Yahoo, and near the end of 2007 AOL had a 40% layoff across the board. At the time of the layoff AOL’s subscriber base had diminished to 10 million, almost even with Yahoo and Comcast.

Tim Armstrong, fthe ormer Google executive, was named Chief Executive Officer in March 2009, and AOL was spun off as a separate public company. The AOL name and brand changed to Aol and commissioned artists superimposed the new log on canvas (“AOL – Wikipedia, the free encyclopedia,” n.d.). Mr. Armstrong then embarked on a series of acquisitions including Patch Media (community-specific news) and The Huffington Post. Partnerships with Yahoo and Microsoft were initiated so that each partner could sell the others’ inventory and the group could better compete with Google. A big advertising push was begun in 2012.

In February 2013, AOL announced quarterly revenue of almost $600 million; the first time revenue had grown in 8 years. Shortly after the quarterly earnings announcement more and significant layoffs began and Tim Armstrong’s Patch Media was spun off.

SWOT, Ability to leverage and execute growth strategies and resources

The AOL brand name represented, certainly for many years, a strong asset. The post merger management team, however, failed to execute its strategy and as was pointed out, the two key leaders left the company only a couple years after the merger. According to Friesner (2014), Time Warner remains a dominant media company throughout the world with 23 magazines and 50 websites. But what can be said about AOL in 2014?

Apart from an increase in revenue announced May 7, 2014, along with a decrease in profits of 64%, AOL’s revenues are in a slump. The decline is largely the result of a decrease in the number of domestic AOL brand subscriber’s along with the sale of their German access business in 2008.

The joint affiliations and partnerships AOL had formed held significant promise if leveraged and executed well. The multi-year alliance with Sesame Workshop, for example, allowed AOL to exclusively distribution the Sesame Street library beginning in late 2009.

The difficulty, or threat comes from firms such as Google, Yahoo and Microsoft’s fierce competition, along with Facebook and Fox Interactive Media. Broadband access providers also continue look to take market share from AOL.

Thompson (2014) recommends principal components of the Strategy Execution Process. Below are brief assessments of AOL’s strategy execution process:

  • Attract and retain employees with proven capability, and at the top proven execution skills. AOL has blundered at times when it comes to human resources management. On Friday, August 8, 2013, during a widely attended company conference call, CEO Tim Armstrong, becoming increasingly annoyed as one of his employees (Abel Lenz, formerly from Patch) walked about the conference room snapping photos, finally said, “Abel, put that camera down. You’re fired. Out.” The imbroglio went viral and Mr. Armstrong was compelled to release an “explanatory memo,” though he never hired back Mr. Lenz (Morrison, 2013). In addition, according to the New York Times (February 14, 2014), Mr. Armstrong changed the 401(k) company matching benefits to be paid lump sum at year-end, rather than evenly throughout the year, attributing the change in part to higher medical costs specifically resulting from the “distressed babies” in the families of two AOL employees. Mr. Armstrong later, under intense public pressure, rescinded the change (Kaufman, 2014). These are not the hallmarks of a compassionate leader but instead create insecurity and consternation throughout the organization.
  • The need to build capability that will enable strategy execution to be successful. In the 2010 to 2014 period, through a variety of acquisitions, AOL became more narrowly focused on digital online advertising targeting TV (video) market share, and appears to be poised to grow both revenue and profitability barring increasingly strong competition, especially from Google.
  • The organization must be structured consistent with the AOL strategy. Given CEO Tim Armstrong’s mercurial management style, along with recently laying off half of the employees from the Patch acquisition (Mr. Armstrong had earlier championed the Patch acquisition), along with a raft of new acquisitions to support the new digital online advertising strategy, it is reasonable to assume more people will need to be hired and that likely more will be fired in order to achieve organizational alignment with the new strategy.
  • The allocation of resources must support the execution of the strategy. The new acquisitions must by optimized and synergized into AOL circa 2009 and going forward. AOL is growing again, about 12% per quarter, and profitable (“Business, Investments, Stocks & Quotes – Yahoo Finance,” n.d.). Its balance sheet is in good shape with equity three time total liabilities, a current ratio of 1.2, and upwards of $300 million of cash flow per year. Barring any unforeseen large capital investments required in order to implement their new digital advertising platform, AOL appears well-resourced to execute its nascent strategy. Much will depend upon the retention of key managers in the and other future acquisitions, along with a productive partnership with AOL’s new alliances.
  • New policies and procedures (P&P) will have to be developed and digested given several disparate business recently coming together. Whenever you have new businesses you have new cultures. Management must integrate best practices from their new businesses and from the industry and do this without incurring the time delay and costs of change resistance and employee turnover. Technology companies are notorious for having weak, superficial P&P, knowing that change happens so quickly they cannot afford to be bound by archaic P&P that no longer suits their new business model.
  • Incentive awards are tied to a combination of adjusted net income along with the achievement of earlier established objectives (“Annual Incentive Plan for Executive Officers, by AOL Inc.,” 2014, p. 3). This is a somewhat common management incentive plan found in technology companies. Cash is used for acquisitions (as is stock), compensation and incentive bonuses; AOL does not pay its shareholders a dividend.
  • Instilling the corporate culture that it will take to compete with Google in a space relatively new for AOL, Mr. Armstrong will need to determine how he organizes his managers, what priorities are at the top of his list, what his objectives and strategies are, and he must ask each manager to come up with a list of their own tactical plans to meet the objectives they commit to deliver.
  • To take the strategy forward will necessitate aggressive competitive behavior, such as undercutting the ad pricing television offers, as well as connecting with as many potential customers as possible. The CEO must meet directly with the biggest of the potential customers to win them over to AOL.

Strategy map


Future opportunities for innovation

AOL is seeking to pursue a strategy to take more advertising market share from television (“AOL CEO Leads Charge to Pry Ad Dollars From TV,” 2013). So called “programmatic” ad buying, or essentially ads via automated exchanges. AOL signed new deals with several ad agencies that have made commitments to purchase online AOL-based ads beginning in 2014. This latest move on the part of AOL is part of a larger strategy to capture television dollars for online video and other platforms. AOL’s 2014 acquisition of for over $400 million was an integral part of this new strategy according to AOL’s CEO. The programmatic ad buying industry is expected to be perhaps as large as $100 billion in just a few years’ time. Advertisers can target the demographic they seek, pull together an audience online and across a variety of sites, and advertisers will have better, more targeted advertisements via the web versus TV.

Additionally, AOL allows advertisers to purchase ads using the same formula as the television industry to determine pricing. To make this work AOL announced in 2012 a partnership with Nielsen to determine overnight ratings that would allow comparison of AOL videos to TV. Last year digital video advertising grew 46% compared to only 6% with TV, though the absolute dollars are only $3 billion in digital video advertising compared to TV’s almost $65 billion.

AOL’s dominant competition is Google YouTube, with over 70 million viewers. At this stage AOL can adopt a fast-follower strategy since they are ranked only #6. Huffington Post, the AOL acquisition, can certainly help leverage this endeavor. Digital video advertising remains a nascent industry, a potential blue ocean that traditional television advertisers will find difficult to overcome. If AOL can focus on this niche, and compete effectively against a blue ocean Google YouTube, they stand to emerge a survivor, albeit a very small version of the size, reputation and market capitalization they held thirty years ago.


During the heady days of the dot-com bubble AOL was viewed as new media and Time Warner old media. A merger that gave 55% of the deal to AOL shareholders, including important operating management roles, began to almost immediately unravel. Over the course of the next several years Time Warner reasserted its dominant status, with its higher revenue and profitability, and spun off AOL in 2009 as a public company. The merger started as acquirer AOL purchased and acquired Time Warner. The reality of the business operations, and later the AOL public company spinoff, indicate Time Warner’s management turned the tables on the original deal and established and supplanted their goals and strategy in the face of inexperienced and impetuous young entrepreneurs. Not until the 2009 IPO and the hiring of Tim Armstrong as CEO did AOL get the chance to develop their own corporate vision and corporate strategy they have been pursuing for the past five years.

AOL was for a very long time in a state of virtually continuous decline, struggling to find a viable strategy through numerous acquisitions followed by almost as many divestitures. With Tim Armstrong at the helm, though still surprising Wall Street with unacceptable profitability and uneven revenue growth, it appears that AOL is beginning to find its footing. In the 2011 to 2013 timeframe AOL is far humbler than its beginnings. AOL generates about $2.5 billion in revenue and has a market capitalization of slightly under $4 billion. Return on assets is about 5 ½% and return on equity 3 ¼% (“Business, Investments, Stocks & Quotes – Yahoo Finance,” n.d.). With a newer, narrower focus and strategy toward digital advertising revenue AOL stands to remain viable. But with competitors like Google, Google YouTube and Facebook, the battle is far from over. The CEO’s challenges include building a secure and aligned team in the face of many acquisitions, some (Patch) ill-fated, overcoming and improving upon poor human resource management in order to attract and retain talented managers, and convincing TV advertisers AOL’s programmatic advertising on a digital platform is the new blue ocean strategy that they should embrace.

r_mannRodd Mann | BBA | MBA | DBA (candidate) | APICS CPIM | Six Sigma Hands-on-Champion



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