Calculating the Tim Armstrong Premium as AOL Goes Public

He's Riding a Wave of Goodwill, but Will Investors Bet on a Rookie CEO?

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NEW YORK (AdAge.com) -- Tim Armstrong has a nice analogy for how the ad business works. Think of it, he says, as marketers driving around the neighborhood in trucks laden with cash, just looking for the right lawn to dump it on.

Put your house in the right neighborhood, fix it up just right, the story goes, and they'll dump a load on your yard, too.

AOL's rookie CEO, Tim Armstrong: Can he lift AOL's value?
AOL's rookie CEO, Tim Armstrong: Can he lift AOL's value?
The good news for AOL, the fourth-largest website in the U.S., according to ComScore, is that for all its problems, it still owns property on Park Place in Internet-ville alongside the likes of Google, Yahoo and Microsoft. And in the eyes of some advertisers, that Mr. Armstrong calls AOL home lifts the value of that property. Call it the Tim Armstrong premium.

"Our house needs some updating and some paint, but it's in the right place on Internet Row," Mr. Armstrong said recently in an interview at the Paley Center with recently appointed AOL board member Pat Mitchell. Mr. Armstrong has a way of making it sound easy, and in his lucrative stint as Google's top sales exec in the U.S., it was.

As the company hurtles toward its Dec. 9 spin-off from Time Warner, it's not only Madison Avenue that AOL has to convince. Wall Street is also about to take a referendum on Mr. Armstrong's vision of AOL as an ad-supported media company built for the internet age. Time Warner has valued AOL at $3.2 billion, which is just a shade more than the $3 billion that Business Insider's Henry Blodget estimated the company would throw off in cash if all of its business units were left untouched and allowed to die over the next few years. "They've set the bar so low he can fall over it," he said.

That's well down from the valuations of $4 billion that analysts were giving the company in September and, of course, a fraction of the $5.5 billion valuation Google assigned to the company in writing down its 5% stake at the beginning of 2009. In a year, then, Time Warner has succeeded in shaving more than $2 billion off the perceived value of the company, a boon for Tim Armstrong & Co. as it readies for its second stint as a public business.

Vote for AOL is vote for Armstrong
Internally, while AOL employees have taken to wearing kitschy "Vote AOL" faux campaign gear, a vote for AOL is, in fact, a vote for their first-time CEO, his vision, his execution and his ability to sell it both internally and externally. By setting the initial bar so low, Mr. Armstrong already has a significant win under his belt. Oddly, after more than a decade of AOL-bashing-as-sport, the consensus on Madison Avenue is that they'd kind of like him to succeed.

"Tim and his team have presence and considerable goodwill," said Rob Norman, CEO of Group M Interaction. "They also need perfect execution of the content and integration strategy, a quick economic mood swing and considerable good fortune."

Mr. Armstrong will also help himself by cleaving another 2,500 from the AOL payroll over the next few months, which will save an additional $300 million in annual operating costs. But that won't fix declining revenue. AOL's biggest cash generator and only profitable division -- its online access business -- is in managed decline. Its network business -- the focus of the last AOL regime -- is poking along, but that will never make AOL the home run its investors are hoping for.

All eggs are in the content business and AOL's ability to sell premium advertising against its nearly 100 million monthly U.S. users. (AOL lags significantly on an international basis, but with its focus on U.S. content and revenue, international is on a back burner, for now.)

One problem: that business, the one built and optimized for the web, has lost $600 million over the past year, in part due to the breakneck hiring pace of columnists, bloggers, editors and other sundry producers of content. Again, the good news here is that AOL lags so far behind its competitors in the amount of revenue it derives from its users that it will be relatively easy to show a market improvement.

"[Mr. Armstrong is] a world-class salesman and part of this story is selling the turnaround, which I think he'll be able to do -- at least for a few minutes," Mr. Blodget said. "If the sales force starts firing on all cylinders again, ad revenue will rise and the turnaround will at least appear to be working, which will send Wall Street into spasms of glee."

Brand needs to live up to product
Making the media properties a success is, more than anything, a marketing problem, which for Mr. Armstrong is kind of like a lazy fastball over the middle of the plate.

"They've got a real challenge to communicate their brand's positioning, which is clearly not as well defined or as strong as Yahoo, Microsoft or Google," said Antony Young, president of Optimedia, a unit of Publicis Groupe. "In the trade, that AOL brand probably isn't living up to the product."

While Mr. Armstrong has brought with him a pencil box full of sharpies from Google, such as global advertising head Jeff Levick; Senior VP Shashi Seth; and agency relations chief Erin Clift. In this sense his biggest appointment will be a chief marketing officer, who will more than anyone be the key to turning around perception of the brand.

Still, some agency folk believe it's not about Mr. Armstrong, but rather that he seems to be taking AOL where it needs to go. Sean Finnegan, president and chief digital officer of Starcom MediaVest, bought his first digital ad from Mr. Armstrong more than a decade ago when Mr. Armstrong was an exec at Starwave/Disney's digital ventures. He says it's AOL's investment in content that will make it a buy.

"It's not the Tim show; it's about AOL's assets," he said. "The game is no longer played where we are trying to mass tons of eyeballs on search and directories -- they are trying to own the hearts and minds of consumers through engaging editorial, and that's where we're headed as well."

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