AOL CEO Switch Raises Eyebrows

Tue, November 21, 2006


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.

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