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AOL Inc. Chief Executive Tim Armstrong is on a mission to show that the company isn’t some dot-com has-been selling Web access and e-mail. It’s a digital-media company with 80 websites churning out everything from personal finance advice to bedroom tips.

The 100 million unique viewers AOL attracts each month are enough to lure advertisers eager to reach multiple audiences with one ad buy, says Armstrong, 38, who took over eight months ago.

Armstrong faces competition from Yahoo Inc., Microsoft Corp. and Barry Diller’s IAC/InterActiveCorp, and a slew of startups — all pushing their own content. Although Armstrong says content is at the heart of his strategy, AOL already tried that and failed. Meanwhile, AOL employees, having endured multiple layoffs and strategies over the past

decade, are demoralized and weary of yet another makeover, Bloomberg BusinessWeek reported in its Dec. 14 issue.

"This is a challenge, I know that," says Armstrong, a first-time CEO who took the job after nine years at Google Inc. "We have to create a company that doesn’t settle for mediocrity."

The New York-based company, which will separate from Time Warner Inc. on Thursday, nine years after their failed merger, has gone through multiple permutations over the past 25 years.

When it was founded in 1985, it provided software for Commodore computers; a decade later, it became America Online. AOL introduced millions of Americans to the Web.

The slogan "You’ve got mail" embedded itself in the popular culture.

As AOL’s stock soared, then-CEO Steve Case developed an ambition to acquire Time Warner, one of the world’s largest media companies. The deal closed on Jan. 11, 2001. After that, AOL adopted and jettisoned several strategies, and AOL Time Warner shareholders saw more than $100 billion in market value evaporate.

Yahoo, Google, News Corp.’s MySpace, and Facebook Inc. came to define the Web. This year, Time Warner CEO Jeffrey

Bewkes, who had criticized the merger when he was running Time Warner’s HBO, set in motion the divorce. He hired Armstrong as CEO. In nine years at Google, most of them as head of U.S. ad sales, Armstrong had made peace with advertisers, then suspicious of Google’s motives, and helped turn the search service into a $20 billion advertising juggernaut.

"Tim needs to articulate the value of AOL," says Robert W. Pittman, a former AOL Time Warner chief operating officer. "He needs a strong selling proposition."

DISAPPEARING REVENUE

AOL’s original enterprise — selling Web access — is dying, but the new operation — selling ads — isn’t big enough to replace it. Recently, the company has made up for the loss in subscriber revenue by cutting costs.

Then came this year’s advertising drought. For the first nine months of 2009, AOL’s revenue dropped 24 percent to $2.4 billion, while operating profit shrank 34 percent to $765 million. According to estimates from equity research outfit Sanford C. Bernstein, operating profit will continue to decline, by 10 percent, to $880 million in 2012.

When Armstrong took over, it had been almost three years since AOL had done any market research and the company had been without a chief marketing officer for 12 months. In those first days on the job, Armstrong found out he needed to reach three kinds of people: those whose still use AOL e-mail and regularly visit AOL news, music, and entertainment sites; younger people who use pop-culture sites such as FanHouse, Stylelist, Spinner or PopEater, and don’t know that AOL owns and operates them; and those who gave up on AOL.

Armstrong hired the ad firm Leo Burnett to conduct surveys among 5,000 people aged 18 to 65. Burnett found that most people are aware of AOL but lack strong feelings about it. About half said they didn’t know what AOL did anymore.

"AOL has the awareness," says Pittman. "It just has to drive out the fuzziness."

Armstrong has become a student of corporate turnarounds. He asks employees to read a 1996 BusinessWeek cover story about Apple headlined "The Fall of an American Idol," about the company before Steve Jobs’ return. Armstrong has taken much of his road map from the Apple recovery, which he sums up as: "New products and services that people find necessary."

Yahoo and other rival sites are mainly aggregators, taking others’ content — news, politics, sports, music — and selling ads against it. Armstrong aims to stand out by creating original content.

A year ago, AOL licensed as much as 80 percent of its content; today, the company says, it generates 80 percent of it. Bill Wilson, AOL’s content chief, has exploited traditional media’s implosion to hire seasoned journalists. Their expertise and voices, Armstrong says, will enhance AOL’s brand. Each week, about 30 AOL editors appear on TV and radio.

AOL also is positioning itself as the go-to source for local communities. Its main vehicle is Patch.com, a collection of sites with a local focus that AOL acquired in June. The idea is to lure national advertisers keen to reach area consumers. So far, most advertisers are local, such as colleges, arts centers and florists. Other sites, including Topix, a venture by McClatchy Co., Gannett Co., and Tribune Co., are vying for that market.

BURNISHING E-MAIL

AOL says e-mail drives people to its sites, particularly because visitors see a page of headlines hawking AOL content whenever they sign on. While instant messaging remains popular, regular AOL e-mail lost 15 percent of its U.S. market share in the last year to rivals such as Yahoo and Google.

To help reverse those trends, Armstrong recruited Brad Garlinghouse, a former Yahoo executive who helped the company go from No. 3 to No. 1 in e-mail. One of the first things he did was to reduce the advertising on AOL e-mail by 60 percent to eliminate the clutter.

To help sell the new AOL to advertisers, Armstrong poached a Google colleague, Jeff Levick.

Shortly after he started in April, Levick concluded AOL had too much advertising inventory — industry lingo for places to put ads. He and Armstrong agreed the oversupply was hurting the rates AOL could charge advertisers. Levick cut the number of ads on the home page to one from 10.

"You raise the quality and charge a premium," Levick says. He isn’t saying whether the tactic is working.

Armstrong wants to give advertisers real-time information so they can tweak their messages. He brought in another Google veteran, Shashi Seth, whose job had been to wring as much money out of ads as possible. Seth gathered 55 AOL computer scientists and ordered them to design algorithms that can predict when demand for specific products and services peak. The technology lured ad buyer Interpublic Mediabrands.

"What we’re seeing here is a very novel approach to advertising," says Quentin George, Interpublic Mediabrands’ chief digital officer.

"We’re excited about how they are looking at consumer demand when it comes to content."

If consumers are apathetic about AOL, some investors are wary. Having been burned by the 2001 merger, money managers may require the hardest sell.

"Why would I buy AOL?" says a media investor, who asked not to be identified. "It would largely be a bet on Tim, given what he was able to do at Google."

AOL may never again be a $70 stock. Though the stock won’t make its formal debut on the New York Stock Exchange until Thursday, AOL has been trading as so-called "when-issued," in which investors can trade the stock before the shares have been distributed. AOL finished Friday at $24.50 a share.

Still, Armstrong says AOL will have a chance to show investors that it is the media model of the future.

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