AOL to Lay off 10 Percent of Staff

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Time Warner's underperforming AOL Internet unit will lay off 700 employees, about 10 percent of its staff, a move it is taking in response to the global economic downturn.

In a memo to employees, AOL CEO Randy Falco said the move was necessary because the tough economy has led marketers to slash their ad spending. It will take AOL several quarters to complete the layoffs.

Those employees who avoid the ax still face bad news: They will not get a merit pay increase this year, which Falco described as "painful" yet prudent.

AOL will also consolidate facilities and lease unused space in its Dulles, Virginia, headquarters.

AOL will also review its international operations and global shared-services functions, and all of its products and services, seeking opportunities to improve operational efficiency.

"With these and other changes, we will take significant annual run-rate costs out of our business while, importantly, retaining the flexibility to invest in our growth strategy," Falco wrote in the memo, seen by IDG News Service.

Although Falco is blaming these belt-tightening measures on the current economic crisis, AOL has been generating disappointing advertising revenue for most of his tenure at the helm.

Many industry observers found Falco's appointment in November 2006 perplexing. He replaced Jonathan Miller, who engineered the AOL business transformation from one based on subscription fees to one based on advertising.

While Miller had years of experience in the Internet market, Falco, a TV industry veteran who had been president and chief operating officer of the NBC Universal Television Group, had virtually none.

Miller, who was unexpectedly fired, had earned praise for his work as AOL CEO, a post he assumed in August 2002. In 2006's third quarter, the last full one under Miller's lead, AOL's ad revenue grew 46 percent. For the 2006 fiscal year, AOL had ad revenue growth of 41 percent, faster than the 35 percent growth of the overall U.S. online ad market at the time.

Under Falco, AOL has routinely failed to grow its ad revenue on par with the industry average. In October 2007, AOL laid off 2,000 employees, which at the time represented 20 percent of its staff.

In the third quarter, ended Sept. 30, 2008, AOL's revenue fell 17 percent to $1.01 billion from $1.22 billion in the same quarter in 2007. Specifically, AOL's ad revenue fell 6 percent, while the U.S. online ad market saw spending grow 11 percent during the third quarter. AOL's adjusted operating income before depreciation dropped to $398 million from $428 million.

Last month, Time Warner partly blamed AOL for a downward revision of its financial forecast for the 2008 fiscal year. Time Warner said that due in part to a $25 billion asset write-down involving AOL and other units, it will post a net loss for 2008, whereas before it had expected to earn between $1.04 and $1.07 per share. It will announce its 2008 financial results on Feb. 4.

Time Warner also revised downward its growth forecast for adjusted operating income before depreciation and amortization, blaming AOL's disappointing ad revenue.

Last week, Google's earnings took a hit in part due to the company's decision to write-down some of its investments, including its AOL stake.

Although persistent rumor has Time Warner actively seeking to divest itself of AOL, Falco ended his memo on an optimistic note: "With your continued hard work and dedication, we will position ourselves to emerge a stronger company ready to lead in a vibrant online market."

The Wall Street Journal's AllThingsD blog first reported news of the layoffs.

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