Tim Armstrong may have saved AOL, but at what cost?

Updated: As AOL continues its battle to replace a declining business model — much of which still involves charging people for dial-up Internet access — with something more robust, there are growing signs that Arianna Huffington is increasing her power base at the company. Among other things, a report in the New York Times notes that much of the integration between the Huffington Post and AOL that occurred (s aol) after last year’s $315 million acquisition is being unwound, and control over those elements is reverting to Ms. Huffington. AOL chief executive Tim Armstrong may have just signed a handsome new employment contract with the company, but insiders say he should probably still be watching his back.
According to the NYT story, control over the technology and business development segments of the Huffington Post — in other words, the parts of the operation that matter the most — are being pulled out of the greater AOL corporate structure and handed over to the Huffington Post founder. Since that kind of synergy was presumably one of the benefits of the acquisition of the Huffington Post in the first place, it makes one wonder what the ultimate outcome of the restructuring will be. Will the HuffPost become a kind of independent entity? According to Ms. Huffington, there are no plans for a spin-off.

Arianna gets credit for the growth, Armstrong holds the bag

The bigger picture is that these moves consolidate the power Arianna Huffington has at AOL, and that power base was formidable even before the current restructuring. Not only did she get control over the entire editorial operations of AOL after the Huffington Post acquisition, including the company’s troubled Patch hyperlocal-journalism operation, but it has also become abundantly obvious that the Huffington Post is one of the few growth engines within the AOL empire, and one of the few reasons the company’s recent results weren’t even worse than they were (another report takes issue with the NYT story and says that Arianna Huffington’s control at AOL has actually been reduced).
That effectively gives Ms. Huffington control over everything good about the company, with Armstrong holding the bag for everything else — especially Patch. Although the Huffington Post founder is now responsible for that unit, Patch is still Armstrong’s brainchild and pet project, and he is having to carry the responsibility for its performance. And that performance is more than just lackluster: After spending close to $200 million on creating local journalism outlets in almost a thousand small towns and regions across the U.S., AOL has virtually nothing to show for it.

That’s not the kind of thing the AOL board of directors — or the company’s shareholders — can be expected to take lightly. It’s true that Armstrong just signed a new contract that extends his employment with the company for four years, but that’s no guarantee he will still be in the CEO chair when 2016 rolls around. And who is his most likely successor? The woman who created the product that is now providing the bulk of AOL’s growth. Selling off the company’s patent portfolio, something Armstrong is said to be considering, may be a smart move, but you can only sell your furniture once.

Armstrong may have saved AOL, but at what cost?

Huffington also just named a No. 2 with some significant firepower: Lauren Kapp, a top executive at NBC News, is joining the Huffington Post, and in addition to being in charge of communications and marketing, she will also be the head of global strategy. As Stelter’s piece in the NYT notes, the Huffington Post has been growing globally with the launch of sites in Canada, Britain and France, and that strategy is expected to continue. And if that produces more growth, as it is expected to, it will be something else that Arianna Huffington can take credit for, even if it is the traffic-driving abilities of the AOL network that are helping propel that growth story.
Not surprisingly perhaps, given what she has been able to accomplish with the Huffington Post in just six years, those who have worked with Ms. Huffington paint a picture of someone who almost unrelentingly accumulates and expands her authority over everything she touches. That is not the kind of person who is going to let Armstrong dictate what she does with the elements of the AOL empire that are under her control — and that’s already a large proportion of the total. So what does she do over the long term? AOL observers say she will either seize power or leave.
Armstrong may have saved AOL (at least for now) by buying Huffington Post and replacing much of the lackluster editorial product with new-and-improved content from HuffPost, but in the end the very assets he purchased could wind up taking over AOL from the inside out, leaving him with nothing but a fat exit package.
Post and thumbnail images courtesy of Flickr user World Economic Forum