AOL CEO Switch Raises Eyebrows

Reactions to Time Warner’s decision to sack AOL’s chief executive officer (CEO) range from lukewarm endorsement to strident disapproval, as the industry tries to make sense of a move many observers find perplexing.

Jonathan Miller, who guided AOL through a complicated transformation from an Internet has-been to a credible player, got his walking papers last Wednesday. Randy Falco, a TV industry veteran who was president and chief operating officer of the NBC Universal Television Group, will take over as AOL’s chairman and CEO.

"It’s a strange move, because AOL is on the way up. Miller was responsible for turning around the ship successfully, so it’s not clear to me why they’re replacing him," said industry analyst Greg Sterling of Sterling Market Intelligence.

Miller, named chairman and CEO in August 2002, had the difficult task of changing AOL’s business model from one focused on dial-up Internet access subscriptions to one centered on online advertising. This involved tearing down AOL’s "walled garden" and making freely available on the Web the content and services it previously reserved for paying members via its proprietary software.

This leap of faith assumes AOL will make up and surpass with online advertising the revenue it will give up by abandoning its Internet access business. Early indications suggest the plan is working.

Although in Time Warner’s third quarter, which ended Sept. 30, AOL’s revenue declined 3 percent, due to the shrinking access business, online advertising revenue increased 46 percent, faster than the industry average, which hovers between 33 percent and 37 percent. This prompted Time Warner officials and financial analysts to shower Miller and other AOL top leaders with praise.

Privately, however, the recovery signs may have come too late and been underwhelming for Time Warner. At a time when an Internet startup like YouTube gets bought for $1.65 billion, Time Warner may have astronomical expectations for AOL that it didn’t see Miller meeting.

"Miller’s accomplishment is that he transitioned AOL from a fee model to a free model, which gives AOL a future. The problem is that AOL remains a property in trouble, one that isn’t performing particularly well, certainly behind Google and Yahoo. That has been the big disappointment. Today, if you have a [company with a] Web model, you’re looking for a very rich return on investment," says industry analyst Rob Enderle of Enderle Group.

But as it searches for bigger online ad growth with an Internet industry outsider as CEO, Time Warner risks turning AOL’s recovery into a relapse. "Falco doesn’t really know the business. That’s going to be the problem: He’s going to be learning on the job. It may not be a huge problem if he’s packaging the company up for sale, but if he’s going to try to run it, it’s probably going to be a [long] learning experience," Enderle says.

As learning goes, Miller is also credited with synchronizing AOL to varying degrees with key trends driving the rebirth of the Web economy, such as blogging, Internet search, digital music, online video and open-development platforms. Lately, he had been spurring AOL product teams to shift their philosophy from making simple yet integrated products and services to developing outstanding ones. "The emphasis today is to make stuff great," Miller said at the Web 2.0 Summit in San Francisco a week before he was dismissed. He added then that this focus is key if AOL wants to increase traffic to its websites, which in turn fuels its online ad business.

Unlike his successor, Miller was no stranger to the Internet business when he joined AOL. He had been president and CEO of USA Interactive’s USA Information and Services (USAIS), which included at the time businesses like Ticketmaster.com, Citysearch, Match.com, USA Electronic Commerce Solutions and Expedia.com.

A Time Warner spokesman disputed claims that Falco is an Internet newbie, saying that at NBC he oversaw the launch of several websites, including one tied to the network’s Olympic Games coverage, and of online initiatives, such as the joint portal for U.S. Hispanics that Yahoo and NBC’s Telemundo network announced in May.

Ultimately, however, Falco comes on board because of his ad sales and traditional media background. "His TV experience and advertising connections really dovetail perfectly with AOL’s focus on video and advertising going forward," the spokesman said. "Randy Falco is the right person to take AOL to the next level."

Falco will provide more details about what that "next level" goal is when he takes over at a yet-undetermined date, according to the spokesman. Miller remains at AOL for now but will leave Time Warner at a date that also has yet to be determined, the spokesman said.

At least one high-profile AOL official has decided to jump ship rather than work under Falco. Jason Calacanis, who sold his very successful Weblogs company to AOL last October and continued to run it as a standalone subsidiary, resigned on Friday, after writing on his blog about his disappointment over Miller’s removal.

Of course, there are precedents among Internet companies appointing chief executives from traditional media companies, like Terry Semel, who became Yahoo’s CEO in 2001 after 24 years with Warner Bros., said James C. Goss, a media and entertainment financial analyst at Barrington Research. Whatever Falco does, it’s clear his key mandate will be to leverage his experience in the TV industry to accelerate AOL’s ad sales business. If he fails at that, his appointment will be seen as a major mistake.

"Obviously, AOL has changed its stripes and this just seems like a reaction to the shift in its business, to have somebody as CEO who has a lot of experience in the media side and, from an organizational standpoint, with a large operation of that nature," Goss said. "This is reflective of the dramatic business model change and of the aspirations" that come with it.

Be that as it may, some Internet industry observers remain befuddled. "From the outside, it doesn’t seem to make any sense," Sterling said.

-Juan Carlos Perez, IDG News Service (Miami Bureau)

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