With Bartz out at Yahoo, is AOL’s Tim Armstrong next?

AOL CEO Tim Armstrong

After months of speculation about her tenure in the top job at Yahoo (s yhoo), CEO Carol Bartz has been fired by a board that appears to have finally grown weary of the web company’s perennial also-ran status. Coincidentally enough, there’s another tech company CEO who has spent two years trying — and failing — to turn around a former web giant: AOL (s aol) chief executive Tim Armstrong. If the AOL board of directors applies the same kind of logic that Yahoo’s did (a decision that should arguably have come a lot sooner, as Om notes), then Armstrong might want to freshen up his résumé.

In many ways, Yahoo and AOL are like different sides of the same coin: Both are gigantic enterprises, and both have legacy businesses that produce plenty of cash but are also a drag on the company that prevent them from being more innovative. For AOL, the dial-up access business continues to generate money — money that Armstrong has used to buy The Huffington Post and to start the Patch.com hyperlocal news venture, among other things — but it is declining rapidly. For Yahoo, it’s the content side of the business and the giant portals that it operates, which continue to get millions of visitors.

Unfortunately for Yahoo, those millions of visitors appear to be worth less and less every day. As the web has expanded, raw page views have become a low-income commodity, and compounding that problem is the shift of online advertising towards social networks like Facebook. It’s no coincidence that Facebook’s advertising revenue has climbed into the billions of dollars over the past several years, while traditional web publishers like Yahoo have struggled to show any advertising growth at all.

Building a content business as advertising slides

AOL is fighting this same trend. Armstrong has made huge bets on content in an attempt to build scale, but investors are skeptical about when (or if) that’s going to pay off. His biggest bet on content, the launch of Patch.com — a network of close to 900 hyperlocal media sites across the country that are staffed by journalists and fed by unpaid bloggers, Huffington Post-style — has cost the company more than $150 million, and is likely to cost that much or more to roll out nationwide if AOL decides to do that.

Patch is an ambitious gamble, but some analysts argue that a company in AOL’s position doesn’t really have the time to watch a gamble like that come to fruition, or spend the hundreds of millions of dollars that it likely will take to do so. As Sameet Sinha of institutional research firm B. Riley tells Connie Loizos of PEHub:

Local is going to be big; I think everyone realizes that. But in this sort of capital markets environment, long-term projects aren’t given much leeway, especially a project like Patch that is much more people intensive than tech intensive

Armstrong seems to be hoping that simply by acquiring enough scale — in other words, enough page views and clicks via The Huffington Post, Patch and other content-based moves he has made since taking over the company — AOL can somehow generate ad revenue that will make it an attractive investment again, and also make up for the declining cash coming from the dial-up business. But every time he says AOL is close to reaching this goal, the goal seems to move further into the distance, and the market is getting fed up with waiting.

Break up or not, Armstrong could be gone

So what can Armstrong do? Paul Kedrosky, a financial analyst and senior fellow at The Kauffman Foundation, tells PEHub that the AOL chief executive has to figure out some way of turning the former web giant into a money-maker, likely by splitting the company into pieces and selling off the ones that aren’t contributing to growth. There have also been reports that AOL might be considering a private-equity deal, which would see the company acquired by a group of institutional investors, who would then presumably auction off the pieces to the highest bidder.

In the end, Kedrosky argues that Armstrong may be doomed regardless of what he does. If he doesn’t break the company up and sell off enough pieces to make it look attractive to investors again, he could get the boot, and if he does break it up and sell the pieces, he’s likely to be replaced once that job is finished. As he told PEHub:

The instant that happens, Tim is gone. He’s a pleasant face to put on a transaction like this, and that has to be among his highest obligations. But if he doesn’t complete it, he’s gone. If he does, he’s gone.

The problem for AOL is that replacing Armstrong isn’t guaranteed to fix things either. Yahoo thought Bartz would be the right leader to turn its sinking ship around, and it has spent two years figuring out this isn’t the case. She proved to be very good at selling things, but not so great at building new businesses. Who’s to say the replacement for either Bartz or Armstrong is going to have any more success than their predecessor? These two former titans may simply have outlived their usefulness.