THE COST OF WINNING: Tim Armstrong, Patch, And The Struggle To Save AOL
On an overcast Friday afternoon last August, a hundred or so employees of AOL's local news subsidiary, Patch, crammed into a cafeteria at the company's headquarters in Manhattan. Another several hundred connected to the room via conference call.
They were waiting to hear CEO Tim Armstrong deliver bad news.
The cafeteria's lights were low, and the semi-darkness reflected the mood. So did the body language. People slumped over the cafeteria's tables, shoulders low. They stood around the edges of the room with their arms crossed in front of them.
This was Armstrong's second visit to Patch that week. Two days earlier, Armstrong had come to the office and told everyone he planned to honor a promise he'd made to AOL's shareholders to make Patch profitable by the end of the year. He had said he was going to meet with AOL's board of directors the following day to decide on a plan. He had said he would come back Friday to announce it.
Armstrong stood at the front of the room against a white wall, wearing a dark suit and no tie.
He began his speech in his usual deep monotone: "There are a couple things I want you guys to realize and really think about and let sink in. And if it doesn't sink in and you don't believe what I'm about to say, I'm going to ask you to leave Patch. I don't mean that in a harsh way, I mean that we have to get Patch to a place where it's going to be successful, and successful for a long time."
Armstrong, who had been the first sales boss at Google, is famous for his rally-the-troops speeches. If not for the sense of dread that accompanied it, this one might have been winding up to be another.
Heating up, Armstrong talked about how "you can blame me" for everything that has gone wrong at Patch, and "I don't care what the press says." He commanded everyone in the room to fully commit themselves to the company.
Then something strange happened.
Armstrong interrupted himself to say, "Abel, put that camera down right now."
Then, without taking a breath, he said, "Abel, you're fired."
For five seconds, the room went silent.
Finally, Armstrong started speaking again. He said: "If you guys think that AOL has not been committed to Patch, and won't stay committed to Patch, you're wrong."
These were motivational words that ordinarily would have fired up everyone in the room. But they didn't … because, not surprisingly, everyone seemed stunned by what Armstrong had just done.
Soon, hundreds of thousands of people beyond the walls of AOL's headquarters would feel the same sense of shock.
Patch employees - reporters after all - began leaking details of the meeting almost immediately. Darrell Etherington of AOL-owned tech news site TechCrunch published the first story about the meeting. It said that Armstrong had "fired an employee who took his photo."
"Our tipster said the public nature of the termination struck them as 'shameful and disgusting' behavior," Etherington added.
Soon, media guru Jim Romenesko jumped in, identifying the "Abel" who got fired as Abel Lenz, a Patch creative director who had helped redesign the site.
Then, the following evening, the story got much worse for AOL and Armstrong. One of the several hundred Patch employees who had dialed into the meeting had recorded the call. This person sent the recording to Jim Romenesko, who published it.
Written reports citing whispers from anonymous sources about Armstrong's behavior at the meeting were one thing. A recording of his speech was something else: Raw, alarming, and strange.
The recording also revealed an odd juxtaposition. Just before firing Lenz for taking a photo during a confidential meeting, Armstrong had said, "I don't care if people leak information … leaking information or anything around Patch isn't going to bother me - doesn't bother me."
The impulsive firing on the heels of this statement made Armstrong sound unhinged - "schizophrenic in his thinking" is how a source close to him later described it.
Several days later, Armstrong apologized privately to Abel Lenz and then publicly to AOL employees. But, by then, mainstream outlets including Yahoo and the Daily Mail had picked up the news. Some people viewed the public firing as a bad-ass CEO move, the kind of thing that a famously demanding executive like Steve Jobs or Larry Ellison might have done. But most people across the country and world saw it as gratuitous and humiliating: What's wrong with Tim Armstrong, people wondered? What kind of CEO fires some poor guy in front of all his colleagues? What did this say about what was going on at AOL?
| LISTEN: Audio of Abel Lenz's firing |
As someone who had frequently covered Armstrong and AOL over the years, I wondered, too. A few days after the firing I asked one of Armstrong's former colleagues at AOL about it. This person surprised me by saying how ordinary Armstrong's speech was.
"This is how numb you get," the executive said. "For Tim, that was actually pretty coherent. On a scale from 1 to 10, 10 being the craziest, that was like a 3 or a 4."
That was startling. But it was also only one person's view of the situation. So, over the next month, I spoke to dozens more sources, including several who currently work with Armstrong at AOL. And I spent several hours with Armstrong himself.
Through these interviews, I learned the backstory of how Tim Armstrong ended up at the front of that half-lit room that Friday in August. I also understood better why he sounded so uncomfortable at the meeting. And why he fired Abel Lenz.
After a depressing 12 years of decline, the industry powerhouse of the 1990's, AOL, is finally stabilizing. Its stock is finally moving steadily higher again. Earlier this week, AOL reported third quarter financial results that beat Wall Street expectations and marked three consecutive quarters of advertising revenue growth. This was a success that several AOL CEOs before Tim Armstrong were not able to achieve.
But Armstrong would not have been able to achieve that success without paying a price. In trying to turn around a huge, collapsing company, Armstrong has had to make many hard, sometimes deeply unpopular, decisions. It was one of these that put him in the front of a room full of people he was about to fire.
Decisions like these are hard to make, especially for a highly likable executive who has built his career on his ability to inspire people and build relationships. Firing hundreds of people doesn't inspire anyone, and it doesn't build relationships. On the contrary - it destroys them. That Friday in August, Armstrong was finally making a decision that he had needed to make for a long time, but had been unwilling to make. And it was killing him.
Armstrong was, in that moment, paying the cost of winning. For so long, it was a price he had never had to pay.
Growing up, Tim Armstrong was the kind of kid who was always figuring out ways to make money.
Like a lot of kids, he had jobs - including pumping gas and working construction. Unlike a lot of kids, Armstrong also started his own businesses.
At first, Armstrong hired a few workers to pick all the ripe strawberries so he could sell them. But then he had an idea. What if he just put out a sign out front that said 'you pick strawberries' and then charged people who stopped by? It worked. People drove up and paid him to do all the work.
"We made thousands of dollars," Armstrong says. "At the time it was a lot."
Back at school, Armstrong majored in economics and sociology. He was also a star athlete, rowing for the first-boat heavyweight crew and playing lacrosse.
Socially, Armstrong was the well-liked popular kid who, as a sophomore, hung out with seniors. One of those seniors, Jen Schumacher Harper, says Armstrong was "goofy and fun and the life of the party."
That's the kind of nice thing people throughout Armstrong's life say about him. Even his detractors say you can't be in a room with him and not warm up to him. He's got that Bill Clinton thing.
Maybe it's Armstrong's height. Maybe it's his skill with eye contact. Maybe it's that Armstrong is a big, handsome guy with severe cheekbones and dark hair who looks like a Bond movie villain but turns out to be nice when he starts talking. It makes you open up to him immediately and want to play on his team.
After college, Armstrong moved to Boston and worked in finance. He hated it and quit. The people were not his kind of people, he says.
To figure out what to do with his life, Armstrong started cold-calling prominent business executives. They wouldn't take his calls. Finally, an executive assistant took pity on him and gave him a clue: "The only way you'll get through is if you're a reporter, or if you know someone they know."
So Armstrong started a small newspaper called BIB, for "Beginnings in Boston." Later Armstrong folded that paper into a bigger one, which he sold.
By the summer of 1995, Armstrong was 24 and ready to work for a major company. He'd been to a presentation on the Web browser at MIT and had decided the Internet was the future. Then he sold ads for a small Web publisher in Boston. But this was still the minor leagues. So, Armstrong moved to Seattle and found a job selling advertising at a company called Starwave, which was owned by Microsoft co-founder Paul Allen. Starwave built and monetized websites for established brands such as Outside magazine, ESPN, and the NFL.
Armstrong's job was to sell ads for Starwave. Right away he was very good at it.
Says a former colleague: "At the risk of offending all the other people who were working as his peers, he was the star. He was the guy who stood out from the beginning as having the focus, the intelligence, the charm, and the drive to make things happen. He was the kid that everyone loved. Everyone had their eye on him and everyone said, 'I want him to be part of my team.'"
Another reason Armstrong did well at Starwave was that he was a killer athlete. At Starwave, that mattered. The company ran ESPN.com, NFL.com, NASCAR.com, and NBA.com. Management thought that meant the staff had to know how to play sports.
So the staff was always training for something during lunch - 200 mile relays, ultimate Frisbee tournaments, whatever. In each sport, Armstrong was always the best.
"He's fast, he's strong, he can do it all," says a former colleague. "He's a golden boy in athletics. Anything you want him to do, he can do."
In 1997, Disney, which already owned ESPN, bought a controlling stake in Starwave and moved four employees to New York to work on an ABC News site and other projects. Armstrong, still in his early-mid-20s, was one of the four.
Coming to ABC's headquarters from Seattle, Armstrong was a huge underdog. The brand advertising sales world is still dominated by TV. The Internet was still a tiny experiment that didn't move the needle. And yet, Armstrong quickly made a name for himself in New York.
He did two things in particular that impressed colleagues. When Disney launched ABCNews.com in May 1997, Armstrong made himself the "point guy" for sales for the entire franchise. He stunned his bosses by selling a million-dollar package to health care company Columbia/HCA. That was a lot of money for Internet ads. Meanwhile, Armstrong became "the guy" doing cross-platform advertising sales for ESPN. To do that, Armstrong had to gain the trust of the ESPN TV sales guys who had the run of the place.
A former colleague remembers being amazed to see Armstrong had managed to get "into the club."
"He was the kid at the grownup table who just kept flirting with overstepping the natural bounds of things, but everyone liked him too much and let him get away with it. The ESPN sales guys then - they were TV sales guys - they're the old, crusty pros. Remember, Tim was 26, 27. They let him into the club and it was pretty dramatic."
Suddenly, Armstrong was the guy at Disney who knew how to sell TV, plus Internet, plus magazine advertising to big brands.
Next, Armstrong joined a news-and-games startup called Snowball.com as vice president of sales and partnerships. Snowball eventually failed. But before it did, Armstrong got a call from a friend who told him that the head of revenue at a Mountain View-based startup called Google was coming to New York and had asked for an introduction.
On the northeast corner of 86th Street and Columbus Avenue - the leafy heart of Manhattan's brownstone-rich Upper West Side - there is a red brick building. On the first floor there is a Starbucks with windows onto Columbus Avenue and 86th street.
If you were walking by those windows in the fall of 2000 or spring of 2001, you could have seen a tall man in a suit sitting across the table from another man or woman. Between them, there would have been too many coffees for two people.
The man in the suit would have been Tim Armstrong, interviewing a candidate for a position in Google's rapidly growing sales force.
The reason for all the coffees was that Armstrong had struck a deal with the baristas. If they let him use the Starbucks as a conference room, he'd buy way too much coffee.
This Starbucks was a convenient location for Armstrong because his apartment was at the same intersection. For a while, that apartment doubled as Google's first office outside of its home base in Mountain View.
Armstrong had joined Google under the assumption that he'd move to California in a year. He never did. Instead, he stayed in New York and hired more than a thousand people.
When Armstrong joined Google, the company's advertising revenue was $700,000 for the year. By the time Armstrong left Google in 2008, the company's revenue had grown to $22 billion.
Armstrong obviously doesn't deserve all the credit for that growth. One reason Google grew into such a huge business is that Google ads are the most perfect ads that ever existed. Consumers search for products, and the people who make those products pay Google to put ads next to the search results that come up. People in the industry look at those ads and say: How hard could it have been to sell those? They sell themselves. Also, Armstrong's people weren't the only ones selling Google ads. The reason Sheryl Sandberg is the chief operating officer of Facebook is that she made a name for herself at Google building a large team of recent college graduates who helped local businesses buy Google ads for themselves.
But even if Armstrong doesn't deserve all the credit for Google's mind-boggling revenue growth, he does deserve some credit. Any portion of $22 billion of revenue growth over eight years is a hell of a lot of revenue.
Armstrong's biggest early challenge at Google was explaining to ad buyers what, exactly, he was selling. New York ad buyers didn't really think about text ads back then. They were buying banners and "rich media." Worse, people also didn't know what Google was at the time. It was number 13 out of 13 search engines in traffic and tiny compared to Yahoo and AOL.
Meanwhile, the biggest fights Armstrong had to win in his early Google days weren't with ad buyers. These fights, he now says, were the "yelling matches at Google over ads and whether or not we were in the ads business."
One battle was over head count. When Google co-founders Larry Page and Sergey Brin hired Armstrong, they told him he could hire 30 people. Armstrong hired that many. Then, after a year, he told Page and Brin he needed to hire 300 more.
Another big win for Armstrong was a Google product that put Google ads on other companies' web sites. Along with a colleague named John Ferm, Armstrong came up with this idea. He hired an executive named Kurt Abrahamson to run the effort. Though much-evolved, this "network" business now accounts for billions of dollars of Google's revenues.
By 2007, Armstrong's Internet career had taken him from a star sales kid to a trusted startup manager to a world-famous business executive. Steve Ballmer asked him to run Microsoft's online businesses. When Yahoo needed a new CEO in 2008, Tim Armstrong was considered.
At the same time, Armstrong was dealing with a big management problem inside Google - the kind of problem that he would later face in spades at the helm of AOL. Armstrong had hired lots of people very quickly. That hiring had helped Google to grow as fast as it did. But in the rush to hire fast, the sales organization in New York had become a mess.
Armstrong had implemented what's called a "matrix" or "cross-functional" structure - one where people have more than one boss and work on different projects. To grow much more, Armstrong realized, Google needed to re-organize its more-than one thousand sales people into a line-based reporting structure, where people worked in one group with one function and had one boss.
And yet, Armstrong was slow to make this change.
By then, Google had moved into an office the size of a city block in Chelsea.
One of those lieutenants remembers sitting in that room looking at Tim lecturing his team about "dithering" and thinking, "Tim, we've all said there are pluses and minuses. Either way we're going to get some resistance. You need to make a call."
"But he couldn't do it," this person says now. "He left for AOL before he ever made that call."
Today, this source offers a theory as to why. And this theory gets to the heart of what is hard for Tim Armstrong and why he took so long to make similarly hard decisions at AOL.
"That matrix organization had gotten, not so much bloated, but overly complex," the Google executive says. "And [Armstrong] wanted to simplify it. He knew deep down that it was the right thing to do, but he knew that there would be a lot of collateral damage in the course of doing that. And the ones who would get damaged were friends of his."
"He's a very loyal guy. He made a commitment to different parts of that matrix organization, and damn it, he's not going to let them down. And even though we brought in McKinsey and they told us to unravel it and Tim bought into it as the right strategy, he couldn't get himself to do that because it would have been a breach of his personal loyalties."
This was the first time Armstrong would struggle to make a call that he knew to be the right call because making the decision would force him to hurt lots of people who had believed in something he built from the ground up.
It would not be the last time.
"Are you guys committed to putting America back online?!"
Moments earlier, he'd been sitting at a table with Time Warner CEO Jeff Bewkes in the private conference room in the back of Bewkes' office.
Bewkes had been a Time Warner executive before it became AOL Time Warner, and Bewkes had always opposed the merger. Now Bewkes was looking for a CEO to run AOL - possibly as a spun-off, publicly-traded company. Bewkes had asked Armstrong if he would take the job.
Armstrong was pretty sure he was going to tell Bewkes yes.
Though not yet 40, Armstrong was already sensing how short life was. He'd decided what remained of his life was his most valuable possession. Because of that, he didn't want to waste any more time at Google, where, as a non-engineer in a company run by engineers, he did not have any room left to grow.
He figured that running AOL would be very difficult - the company had been in a desperate tailspin for more than 7 years. But Armstrong also viewed AOL as an undervalued asset. It had a well-known brand, and though it was a top-5 company on the Internet, its valuation was far smaller than the top 4: Google, MSN, Yahoo, and Facebook. Closing that valuation gap even in the slightest would be a huge success.
Plus, AOL still had a very profitable Internet access business. Armstrong believed this business could provide the capital needed for the kind of big bets AOL would have to make to turn itself around. Armstrong already had a specific investment in mind - a local news startup he had co-founded called Patch. He'd already put some of his own money into Patch and made an old friend, Jon Brod, CEO of the company. Armstrong believed Patch could fill one of "the last white spaces on the Internet."
Finally, Armstrong was in a position to take a risk with his career. At 38, his Google stock had already made him worth hundreds of millions of dollars. That money would not go away if AOL didn't work out.
The elevator arrived. Armstrong stepped through the open doors. Later, he called Bewkes and took the job.
A new hope
When Time Warner announced Armstrong's hire on March 12, 2009, a wave of relief washed over AOL's employees. 2008 had been a horrible year for the company. So had 2007. And 2006. And 2005. Really, it was hard to remember what a good year felt like. It seemed like every Christmas season, there were layoffs.
The basic problem was that AOL had become a big, rich company because, in the 1990s, tens of millions of Americans had paid AOL $20 per month to get online. But then came broadband and there went the appeal of dial-up Internet access. Advertising dollars were supposed to replace those lost dollars, but by 2008, even that business was collapsing.
A former senior AOL executive remembers AOL prior to Armstrong as "an environment that felt very demoralized and somewhat abused, with the constant revolving door of leadership, at multiple levels not just at the CEO level, constant changes in strategy, and no apparent real plan for winning."
Armstrong began his first day at AOL by touring the company's New York offices. Then he flew to Dulles, Va., where AOL was headquartered until 2008. He met with his senior managers. Then the whole group walked out to a big tent where thousands of AOL employees were gathered in front of a stage.
Armstrong got on stage. He took a microphone. He shouted: "Are you guys committed to putting America back online?"
"Don't worry about Wall Street!"
"Don't worry about the press!"
"Worry about building great products!"
The crowd shouted back in jubilation.
Finally, this was a CEO they could love.
Finally, this was a winner.
Armstrong's AOL
At the end of his tour, Armstrong hosted a dramatic meeting at the Time Warner Center where he revealed his plan for the company. At the front of the room, there were two whiteboards turned away from the audience. On one, Armstrong said, were ideas that employees had for the future of the company. On the other, were Armstrong's ideas. He turned around the whiteboards. The ideas were the same.
AOL, Armstrong decided, would be a media company powered by technology. It would, like Time Warner, Disney, and other traditional media companies, own multiple beloved content brands for the platforms of the future.
Then, over the next two-and-a-half years, Tim Armstrong gradually but dramatically re-shaped AOL.
He arranged its spin-out from AOL. He hired a board of directors and orchestrated a massive employee buyout to reduce head count and cut costs. He re-designed the AOL.com home page. He also redesigned AOL's headquarters in New York to make it look more like Google's offices.
He sold off Bebo, an embarrassingly unpopular social network that the prior AOL administration had acquired for $850 million. He signed a lucrative search deal with Google.
He replaced his entire executive team, hiring former Google colleagues and other talented executives from big Web companies. He told them that AOL, spun out with a $3.15 billion market cap, would eventually be a $20 billion company.
Not surprisingly, Armstrong also made missteps, gaffes, and strange decisions that reminded people that he was a rookie CEO. For example, he arguably took too long to sharply reduce AOL's workforce, a mistake that led to a continuation of the rolling "death by a thousand cuts" layoffs that had so demoralized AOL's team over the prior decade. He also imported some management practices from Google that didn't even make sense at Google, much less at AOL.
For example, as Google's founders had in Google's early years, Armstrong insisted on approving every hire AOL made and also showed a bias for hiring only graduates of top universities. This practice ensured that Armstrong would be able to personally "vet" every new employee. But it also created a frustrating bottleneck and offended some of his senior team.
Once, during a regular Monday morning review with top executives, one of Armstrong's lieutenants, the west coast product boss Jason Shellen, asked Armstrong if he could hire his temporary assistant full-time.
Armstrong took a moment to review the assistant's resume. Then Armstrong looked up and spoke at the speaker phone, through which Shellen was connected to the room.
He said, "We're not hiring people from the Melting Pot."
Before temping with AOL for the prior three months, Shellen's assistant had been a hostess at a chain fondue restaurant called the Melting Pot.
Armstrong said, "Why don't you just hire a Stanford grad?" That's where Armstrong had hired his executive assistant from at Google, after all - Maureen Marques. By then, Marques had gone on to become a senior executive at AOL.
Shellen couldn't believe it. He said, "This is the most ridiculous thing I've ever heard." He liked his assistant, the former hostess from Melting Pot. She had done good work for three months. And she was cheap at $45,000 per year.
Armstrong said: "We're not hiring her." Shellen's career at AOL ended not long afterwards.
Eventually, after learning on the job, Armstrong ended this micro-management practice. Now he personally approves only hires of Senior Vice President and above.
Big bets
Armstrong hadn't quit Google to run an annuity.
During his first three years running AOL, Armstrong used the cash flow from AOL's rapidly declining, but still very profitable, dial-up business to make two huge bets.
He bought Huffington Post for $315 million. And he poured hundreds of millions into his local news startup, Patch.
The Huffington Post deal was splashier. In February 2011, Tim Armstrong and Arianna Huffington invited AllThingsD reporter Kara Swisher to the Super Bowl in Texas so she could interview them about the deal they had just completed. From an outside perspective, this deal and AOL's earlier, much smaller acquisition of tech news site TechCrunch, were Armstrong's first major financial commitments to building a multibrand media company - a new-age Disney.
But Armstrong had also come into AOL with a plan to spend hundreds of millions of dollars on a brand he believed would someday be as large as or larger than the Huffington Post: Patch.
Armstrong had come up with the idea for Patch on a Saturday morning in 2007. He was driving to his home in Riverside, Conn., with his kids in the car. At a stoplight, he spotted a bunch of signs stuck into the ground advertising stuff to do around town. At home, Armstrong checked and couldn't find an online calendar listing local events.
Armstrong called the editor of the local paper and told him he should build such a product into the paper's website.
The editors said, "We don't really need any help. We have a fine business."
Armstrong disagreed, and decided to start a company around local news and event listings for communities like his own. He called it Patch, and put Jon Brod in charge of it. Brod was a friend who had been running Armstrong's personal investment fund.
After AOL spun out of Time Warner to become a public company in late 2009, Armstrong had to convince the company's board of directors to allow him to invest heavily in Patch. This wasn't hard because Armstrong had, with the help of executive recruiter Jim Citrin, just hand-picked AOL's board of directors. Everyone joining the board already knew what they were getting into.
At one of his first board meetings, Armstrong told the assembled directors that Patch was "a huge opportunity," but that "it's not for the faint of heart." He promised to keep an eye on Patch metrics and report them. He wanted to make sure the board was comfortable with the big bet he planned to make. The board authorized him to invest $50 million in Patch during 2010. It allowed him to spend $160 million in 2011.
By some estimates, the board would eventually allow Armstrong to invest a staggering $500 million in Patch, exceeding AOL's purchase price in Huffington Post by almost $200 million.
This money went toward hiring people - lots of people. Armstrong gave Patch executives a simple direction: Blow this thing out. They did. By 2013, AOL would set up more than 800 Patch sites around the country. For a time, each site was operated by at least one editor. Hundreds more Patch employees sold ads. AOL chose locations for Patch sites using an algorithm that considered 59 variables from voter turnout to average income.
Patch, importantly, was Armstrong's baby. Patch had - and has - executives who believe in it, but they were there because Armstrong created the company and found a way to fund it.
"Patch was his," says a former AOL executive who reported directly to Armstrong. "In management meetings it wasn't, 'What do you think of Patch?' It was, 'Here's what we're doing with Patch."
One Monday morning during the fall of 2011, Armstrong sat down for his regular meeting with his senior executives in a conference room at AOL's headquarters called the 110% Room.
By then, Patch had already consumed more than $100 million. But that morning, Armstrong made a presentation to his lieutenants on plans to invest even more.
When he was done, Armstrong looked around at his gathered executives.
He said to them: "Anybody object?"
No one said anything.
And why would they?
He was their boss. And Patch was his.
But AOL wasn't his. AOL was AOL's shareholders'. And Tim Armstrong's lieutenants weren't the only ones concerned about all the AOL money Tim Armstrong was pouring into Patch.
In April 2011, AOL had a record month for advertising revenues. May was also healthy.
The timing was fortuitous. AOL had spent $315 million on The Huffington Post and almost as much scaling Patch. Shareholders were more likely to cheer that kind of aggressive investing if the company's core businesses were cranking.
But then came the third week of June.
Tim Armstrong, on a trip to an advertising conference in Cannes, France got a call from his CFO, Artie Minson. Minson had bad news: "June's fallen off a cliff."
After two strong months, this was disturbing news. It put into question the whole trajectory of the company - and, with it, Armstrong's strategy. Armstrong worried that the third quarter would also be a disaster and that shareholders would severely punish the company.
That's when Armstrong made a decision he would later regret.
He told Minson to warn shareholders that AOL's third quarter might not be as big as the company once thought. Minson did this during a conference call with analysts in July, when AOL reported its second quarter earnings.
Armstrong hoped that Wall Street would reward him for his caution. The rule of thumb was that you were supposed to underpromise and overdeliver.
The plan didn't work. Shareholders abandoned AOL, furious that it had been investing so much in money-losing businesses like Patch and Huffington Post while the prospects of its core media businesses looked so weak. The day AOL reported second-quarter earnings and gave lower guidance, AOL stock plummeted more than 20%.
AOL had already been trading lower that year - stuck in the low $20 range after a high of $28 per share in April 2010.
On August 12, 2011, AOL stock hit $11 per share.
Analysts noted the share price made AOL's market capitalization so low that someone - maybe a larger company or a private equity fund - would have been able to buy AOL, get rid of all its businesses besides dial-up, and recoup the cost within a handful of years.
In other words, this was the perfect moment for an "activist shareholder" to step in and take over the company. And then get Armstrong and his team fired.
Later that year, on the evening of his 41st birthday - Tuesday, Dec. 21, 2011 - Tim Armstrong got in the back of a black Lincoln Town Car, ready to go home.
As he reflected on the party, Armstrong felt like AOL was finally getting into good shape, three years after he took over.
A week earlier , Armstrong had hosted 150 of AOL's top executives at a meeting in New York. He shocked the room by giving everyone in attendance a $10,000 check on the spot. This had been a fun way to spend $1.5 million.
So Armstrong was feeling good. Despite a rough few months that summer, 2011 had been a good year.
Then Armstrong looked at his email.
In his inbox, he found a message forwarded by AOL's head of investor relations. It was a letter from Jeffrey Smith, head of an investment firm called Starboard Value LP. The letter said that Starboard had acquired 4.5% of AOL. The letter began friendly enough, with a "Dear Tim." But then it went on to make a point-by-point case against Armstrong's management of the company.
Smith's biggest criticism of Armstrong was his massive investment in Patch.
"We believe the current market price of AOL fails to reflect the substantial value of the sum-of-its-parts," wrote Smith. "Shareholders have clearly given up hope that the massive investment in the Display business, and most dramatically in Patch, will generate an acceptable return on investment. Shareholders are also clearly concerned about the Company's track record of capital allocation and how the Company will spend its cash resources going forward."
The letter called for AOL's board - the only people who could tell Armstrong what to do - "to take immediate action to address the significant concerns highlighted in this letter."
It hinted that AOL shareholders might be better off if AOL sold off its parts and returned the cash to investors.
The letter ended with a request to meet with AOL management and its board of directors "to discuss our views on how to enhance value for AOL shareholders."
This wasn't a mere private letter Smith had sent Armstrong via Ryan; it was an open letter, sent to industry reporters around the country.
This very public shaming from Starboard was the first head-butt in what would become a five-month fight for control over AOL.
The cost of losing
Later that week, Armstrong organized an emergency conference call with AOL's board of directors.
Everyone on the board understood the seriousness of the threat.
Public companies, such as AOL, are owned by shareholders. Shareholders controlcompanies through elections. Every year, shareholders vote to decide who should be on the company's board of directors. The main job of these directors is to hire and fire the CEO, as well as give advice and consent on major decisions facing the company.
By announcing it had taken a 4.5% stake in AOL and then demanding to meet with Armstrong and AOL's board , Starboard was brandishing the threat that it might encourage AOL's other shareholders to fire AOL's board and hire a new one. If Starboard were to act on that threat, it would be the start of what's called a "proxy war" - a reference to the proxy forms shareholders fill out when they vote for directors.
Starboard's Jeff Smith is what's called "an activist shareholder." He makes his money by seeking out public companies he believes are undervalued due to mismanagement. He buys a stake in the undervalued, mismanaged company and then shouts until management takes his advice or gets replaced. Smith profits when the once-mismanaged company's value rises under better management.
Armstrong and AOL's board knew that a board of directors elected by Starboard and its allies might not keep him as CEO. Given the accusations of mismanagement in its letter, such a board would certainly toss out Armstrong's plan for the company - starting with Patch.
The threat was simple: If Starboard had its way, Armstrong would lose his vision for AOL, and possibly his job.
If, over the next few months, Armstrong had any doubt about how much damage an activist shareholder could do to the career of a CEO, all he had to do was watch what was happening to Yahoo. In August 2011, a hedge fund manager named Dan Loeb had announced a large stake in Yahoo and demanded representation on its board. By the end of May 2012, Yahoo's CEO was out, tarnished by a resume scandal.
On the call that day with his directors, Armstrong reminded them that most companies dealing with activist shareholders like Starboard's try to settle. Usually that means giving the activist a board seat and modifying the company's strategy.
This was something Armstrong did not want to do. But he didn't tell board members that. In fact, he did not indicate one way or another whether he thought AOL should fight Starboard or begin negotiating.
He just laid out the facts. This was a prudent tactic. At that time, almost all of AOL's board members thought it might be better to try to negotiate a settlement. They were sensitive to the notion that legally they owed their loyalty not to the CEO who had gotten them their board seats, but to AOL shareholders. And so far, Smith seemed to be making a strong case for splitting up AOL. Also, every piece of advice the board was getting from experts was, "negotiate, ?gure out a way to make it work."
One board member, however, did not want to appease Smith: Fredric Reynolds, the former chief financial officer of CBS. Tim Armstrong is the chairman of AOL's board, and he sets the agenda for all its meetings. But after Armstrong, Reynolds was the board's leader - an almost-chairman. From the beginning of AOL's fight with Starboard, Reynolds insisted that his fellow directors back Armstrong to the end.
Before deciding one way or another, the board agreed that Armstrong should meet with Smith and see what his vision for AOL actually was.
That meeting would make the choice between fighting and negotiating an easy call.
Inviting the enemy in
Smith had a Starboard colleague, Peter Feld, and another analyst with him. Smith is skinny with dark, curly hair. He has a long nose, and when he talks he leans his head slightly back to see over it. Feld is thicker in the shoulders and at the collar, with glasses.
On the AOL side twas Tim Armstrong, AOL investor relations manager Eoin Ryan, AOL board member Fredric Reynolds, and AOL CFO Arthur Minson.
After introductions and handshakes, everyone sat down.
Armstrong stood up and walked to the far wall of the room, which was one giant whiteboard. Armstrong said he would walk Smith through AOL's strategy. He began a long speech in his deep monotone. He started drawing on the whiteboard.
As Armstrong talked, Smith waited for him to address Starboard's basic concern with AOL: its irrational investments in original content overall, and in Patch in particular.
In Smith's view AOL had a valuable website in AOL.com, which many millions of people visited each month. AOL's mistake, he believed, was that trying to make money by creating content for that page. He thought AOL would be better off trading traffic for content from other publishers.
But more than any other of Armstrong's decisions, it was his massive investment in Patch that most perplexed Smith. He and his team had done the math, and they couldn't figure out how Patch was ever going to be profitable. They had counted all the ads available for sale on Patch and multiplied that number by the rates AOL was charging. The number still fell short of the amount it cost AOL to employ Patch's 1,000-plus-person workforce.
And that was assuming Patch was selling all its ads. Smith estimated it was actually only selling fewer than 20% of them. He didn't think that number was going to climb higher, mainly because Patch sold ads to local businesses on a flat monthly basis. The price for most online ads is determined by how often they are viewed or clicked-on. Judged by those metrics, the flat rate AOL was charging for Patch ads was insanely high. Smith believed any sophisticated small-to-medium business would never go for AOL's rate.
In the meeting, Smith looked over at the silent Fredric Reynolds, who represented AOL's board in the room. He wondered why Reynolds and his directors hadn't done the same math as he had on Patch.
Many minutes later, Armstrong was still at the whiteboard, using almost the whole thing to lay out his strategy.
AOL's red-headed senior vice president for investment relations, Eoin Ryan, looked across the table at Smith. From Smith's body language, he saw that Smith wasn't getting what Armstrong was saying. Ryan thought maybe because Smith and Feld had backgrounds in finance, some of Armstrong's vision for AOL as a product for consumers was going over their heads.
It was true that Smith and Feld were befuddled - but they were mostly alarmed. As an activist investor, Smith has to meet with management teams all the time. For him, it's obvious when they know how their core businesses fit together with the businesses they are trying to grow and develop. But looking at Armstrong's board, full of arrows going all over the place, it seemed to Smith that Armstrong and his team were just grasping at straws, hoping that something they threw at the wall would stick.
The meeting broke up cordially, but with nothing resolved.
Smith left the building impressed with Armstrong's charisma. What people said was true: Armstrong was a natural leader, clearly one of the best salespeople on the planet. But Smith also felt Armstrong was too focused on the big picture at the expense of details - that he had no discipline for investment.
Armstrong, meanwhile, had found the meeting frustrating. He felt like Smith was only able to understand the company from a purely financial perspective. He'd been hoping to get new ideas for products and strategy.
Smith and his team would meet with Armstrong and his team in that room and over the phone three more times over the next two months.
For the AOL side, the hope for every meeting was the same: Armstrong's team wanted to hear Smith's long-term strategy for AOL and figure out if there were a way to incorporate it into their own. They wanted Smith - a major owner of the company, after all - to feel that he was being heard. They wanted to avoid a proxy fight without sacrificing Armstrong's long-term vision for the company, one that involved original content, Huffington Post, and Patch.
But at a final meeting in late February it became clear that there was only one way this thing was going to go.
Armstrong had just finished going through his plan for AOL one last time.
He asked Smith: "What else are you looking for from us?"
Smith said: "We want board representation. I want to be on the board. Here's how it's going to work: We can put out a release saying we came to a mutual agreement to put me on the board, or we can go to the shareholders and have a vote. We're confident we will win."
The answer from AOL was silence.
Smith had finally made his threat to Armstrong: Put me on your board, where I'll be the one to hold you accountable for major investments like Patch, or let's go to the shareholders ask them who they want in charge.
Armstrong faced a career-defining choice. Compromise, and be forced to run AOL someone else's way, or fight a public proxy war and potentially lose control over the board and AOL anyway.
In making his decision, Armstrong reflected on recent meetings with the board. Fredric Reynolds had finally prevailed in convincing his fellow directors that Starboard had nothing to offer, and that the other directors should back Armstrong. At one of those meetings, after waiting for all of AOL's other directors to speak up, Armstrong himself had begun lobbying the board to fight off Smith.
Armstrong went with his gut. He told Smith he did not want him on his board.
The meeting ended.
And Jeff Smith went to war.
On Feb. 24, 2011, Smith wrote another open letter, this time addressed to AOL's board of directors.
"We appreciate the ongoing dialog we have had with management and certain members of the Board over the past two months. However, we are extremely disappointed that our conversations regarding the issues raised in our letter have stalled. Specifically, we are troubled that the Company remains closed-minded to alternative value creation initiatives, and instead appears solely focused on pursuing the status quo."
"We are increasingly uncomfortable with the direction of the Company and the leadership of the Board. To this end, and as a result of our inability to arrive at a mutually agreeable resolution on the composition of the Board, we have identified the following highly-qualified candidates who have agreed to be nominated to the AOL Board at the 2012 Annual Meeting. We believe these nominees possess a well-balanced mix of skill sets to ensure that the Company evaluates, with an open mind and a keen sense of urgency, all alternative strategies to determine the best path forward to maximize value for all shareholders."
Pulling a rabbit out of a hat
Tim Armstrong's decision to go to war with Starboard wasn't just the result of his confidence that his board was behind him. He also felt confident he was going to be able to end the proxy war in one shot.
He felt this way because of a chain reaction of events that had begun the prior July.
In late June Apple and Microsoft had finalized an agreement to jointly acquire the patents of failed telecom giant Nortel for an astounding $4.5 billion.
She called one of her deputies, Sarah Harris, AOL's intellectual property expert. Jacobs told Harris to engage a firm to conduct a valuation of AOL's patent portfolio right away.
Because Armstrong had insisted that AOL retain its patents after its spin-off from Time Warner, Jacobs knew the company had a lot of them. It was time to find out how much they worth.
Over the next six months, it became obvious the patents were worth a lot.
One AOL executive remembers sitting at a desk at AOL's office in Dulles, reading an AOL patent for a technology where a user inputs geographic Point A and geographic Point B, and gets turn-by-turn directions back. This executive thought: Everyone in the world is violating that patent. There were many more like that. AOL owned patents for the foundations of the Internet: instant messaging, email, chat rooms, shopping carts, Internet radio, and search. Another sign that AOL had something with its patents were the 17 unsolicited offers to buy them made during 2011.
By the time AOL started meetings with Starboard in the middle of January 2012, Armstrong knew AOL had a valuable asset that wasn't being recognized by shareholders. And when Starboard finally declared war on Feb. 24, Armstrong was pretty sure the patents would help him win the fight.
Then, in early March, an industry rival inadvertently did Armstrong and AOL a huge favor. New Yahoo CEO Scott Thompson, also dealing with an activist investor, had decided to make money from Yahoo's patent portfolio by suing Facebook over 10 patent violations.
This put Facebook in a patent-buying mood. On a Saturday in early March, Facebook COO Sheryl Sandberg called Tim Armstrong to find out if AOL's patents were for sale.
Armstrong said yes, and the talks quickly resulted in a stunning offer from Facebook. It wanted to buy AOL's patent portfolio for a billion dollars.
A billion dollars!
At the time, AOL's entire market cap was only a little more than a billion dollars. A surprise billion dollars in the bank would almost certainly end the proxy fight with Starboard.
Armstrong immediately brought the offer to AOL's board of directors. The offer shocked them. What shocked them more was that Armstrong was certain that AOL should not accept Facebook's offer.
Accepting the first big offer for the patents without a more formal auction process would only give Starboard more ammunition to say AOL was being irresponsible. AOL launched a two- to three-week auction for the patents.
Armstrong - the world's greatest salesman, the kid everyone loved - worked the phones, speaking directly with the principals at the world's richest technology companies. He was in his element.
Finally, he negotiated a deal with Microsoft CEO Steve Ballmer to sell 800 of AOL's patents for $1.1 billion. This deal was far more favorable than the deal Facebook had offered because it left AOL with a number of patents the board thought it would need in the future. AOL cleverly structured the deal so that some of the companies it had acquired a decade before, including Netscape, were sold with the patents. That way it could mark the sale down as a loss and avoid paying a high tax bill.
The week AOL announced the patent sale publicly, its stock went up 43% in one day.
After the sale, Armstrong wondered if Jeff Smith would change his mind and seek a settlement, even if it meant not getting a board seat, rather than going through with a proxy war he was sure to lose.
Smith didn't.
Smith had noticed that in AOL's announcement, it had said the company was going to return a signification portion of the sale's proceeds to shareholders.
On the phone, Smith told Reynolds he wanted AOL to give the entire $1.1 billion to shareholders, through a share buyback or a straight dividend.
Reynolds said AOL wanted to save some of the money "for a rainy day" and to be able to do more acquisitions.
Politely, Smith went off on Reynolds.
Smith said, "With all due respect, I don't think the shareholders are happy with the acquisitions that you've done. You have a substantial amount of cash on your balance sheet already and you're producing hundreds of millions of dollars in cash flow every year. I don't think that the shareholders really want to trust you to keep that for acquisitions. I don't think that you've told them that you're keeping that for acquisitions. I think that if you told them that you were keeping it for acquisitions, I think that the shareholders would be very unhappy about it."
Smith told Reynolds Starboard was going to stay in the fight.
Time to make promises and threats
The truth is that a proxy war is a contest between a company's management team and an activist shareholder for the hearts and minds of about 10 professionals.
A public company like AOL has many thousands of shareholders but there are only about 10 large ones who matter.
In AOL's case, its 10 largest shareholders own about 50% of the company. They are mostly hedge funds and mutual funds. You might recognize some of their names from your 401(k) or TV commercials: BlackRock, State Street, RS Investment, DE Shaw, Dodge & Cox, and Vanguard.
Each fund is run by a professional who controls all the votes for every share owned by their fund.
So as soon as Jeff Smith published his first open letter Dec. 21, 2011, Armstrong began a campaign to win these professionals to his side.
Armstrong had until the middle of June 2012, when final shareholder votes were due and the next year's board of directors would be officially elected. And, in the interim, he worked his relationship magic.
One of Armstrong's colleagues describes the period of constant shareholder meetings between December and June as "Groundhog Day," after the Bill Murray movie where the main character keeps waking up on the same day over and over again.
Armstrong has always had a strong work ethic, and he thrived on the grueling hours. A colleague says he was taken aback when one night, after five days on the road visiting shareholders, he overheard Armstrong on the phone with his wife.
Armstrong was going straight from the airport to his daughter's lacrosse game, which he was coaching. He was asking his wife if she could meet him at the game with clothes to change into. Armstrong was actually coaching three youth sports teams at the time - his son's basketball team and two different girls' lacrosse teams.
Despite his tireless campaigning, Armstrong was still nervous about the proxy war in mid-April 2011.
Jeff Smith had just surprised Fredric Reynolds with the news that Starboard would not be ending its proxy fight, despite AOL's $1.1 billion patent sale.
Now Armstrong only had two months left to lock down the votes of those 10 fund managers.
He and his lieutenants decided it was time to start making promises to AOL's top shareholders - and perhaps a threat or two if necessary.
The threat to shareholders, which never came directly from Armstrong, was that if Smith won the proxy war and was allowed to reconfigure AOL's board and restrain Armstrong's vision for the company, Armstrong would quit. Although AOL's shareholders might not have been thrilled with all of Armstrong's decisions over the prior three years, they certainly didn't want him to leave. After all, he had done what none of AOL's CEOs had been able to do since the peak of the dotcom bubble: Make AOL's stock go up.
The promises to shareholders, meanwhile, came during a conference call to announce AOL's first-quarter financial results.
Armstrong told analysts, "We regularly spend time with many shareholders and after listening to their feedback and ideas we're announcing the following today."
Then he listed off five commitments AOL would make going forward.
He said AOL would increase its earnings expectations for 2012 and 2013, distribute 100% of the patent sale proceeds back to shareholders, more clearly report which parts of AOL were doing well and which were not, appoint an independent board member, and, importantly, bring Patch to profitability by the end of 2013 "through revenue and cost improvements,"
Internally, that last promise - the one about Patch - stunned Armstrong's colleagues. As much as AOL executives hated what Jeff Smith was putting the company through, many of them agreed that he had a point about Patch. They didn't believe that Patch could reach profitability through actual revenue growth. That meant that in order to keep his promise Armstrong was going to have to drastically reduce the size of Patch.
The votes come in
As the calendar raced toward June 14, AOL's proxy firm began emailing daily vote tallies to AOL's senior vice president of investor relations, Eoin Ryan.
The numbers looked good for Armstrong and the AOL board. In fact, it became clear that management was going to win the proxy war going away.
Starboard's Jeff Smith called around to see why shareholders weren't voting for his candidates.
AOL's big shareholders told him two things: They said they were grateful he'd gotten involved with AOL and forced management to make a series of promises. They said they had rejected Smith's directors because there was gossip that if Smith's candidates won, Armstrong would immediately resign.
On June 13, the day before voting was over, it was obvious that Tim Armstrong and his board had won.
Looking back on the contest, a major AOL shareholder says Armstrong won the proxy fight because he is "trustworthy." This fund manager says that when he is making huge investments of tens of millions of dollars into public companies, "All I have to go by is: Do I trust the CEO and the board that they will do what they say they will?" He said with Armstrong, the answer is yes - that he had a "flawless track record of doing exactly what he said he would do."
Illustration by Mike Nudelman
Winning the proxy fight against activist shareholder Jeff Smith was huge for Tim Armstrong. The win protected his job and reputation. It also saved his vision of AOL as a multibrand media company, powered by technology, and seeded with funding from a profitable, but declining subscriber business.
But the high point of Tim Armstrong's first five years at AOL was not June 14, 2012, the night he celebrated his win over Starboard with family in Baltimore. The high point was the first weekend of November 2012. This was the weekend Hurricane Sandy hit the northeast coast of the United States.
That was the weekend when Patch - Armstrong's baby - finally really mattered for AOL and tens of thousands of readers. It was when, finally, Patch looked like it would be a long-term success.
By October 2012, the Patch network had grown to 906 sites. Among the communities covered by those sites, 329 of were affected by Hurricane Sandy. The 400 Patch journalists writing for those sites wrote 14,000 articles on Sandy. They wrote useful stories that their communities needed, answering questions like whether Sandy would hit their town, when it would hit, which stores would be open to sell supplies, which shelters had blankets, and when the power would come back on. Every day of the week Sandy hit, Patch broke new traffic records. Traffic was twice as high as normal. In the 329 communities in Sandy's path, traffic was four times higher than normal. Patch's mobile app saw a 700% increase in downloads.
That week, government officials in the towns affected by Sandy reached out to Patch executives for help. People around the country were sending supplies, but they were sending the wrong supplies to the wrong areas. Would Patch help get the message out about which towns need which supplies?
Patch CEO Jon Brod brought the request to Armstrong on a Friday night. The next morning, Armstrong called Brod with a different plan. Armstrong said to Brod: Instead of passing along a message and helping other people send the right supplies to the right towns, AOL and Patch should just get the job done themselves.
As he had when AOL sold its patents, Armstrong began calling the heads of major corporations, asking for help. Wal-Mart and Home Depot responded most quickly. Then Armstrong flew down to AOL's massive office complex in Virginia. With the help of 500 AOL employees and senior executives, he loaded two 18-wheel trucks with supplies. The trucks had huge AOL and Patch logos painted on their sides. After Dulles, they stopped at AOL's Advertising.com office in Baltimore for more supplies. Then they rolled on, reaching Long Island by Monday morning.
Illustration by Mike NudelmanOur guess at Armstrong's mascot for PatchWhen the deliveries were done, Armstrong threw a big rally in Dulles with all the employee volunteers who had helped. Heidi Klum showed up. Armstrong was ecstatic and impassioned and everyone else in the vicinity could feel it.
The moment felt great for Armstrong because of how he and AOL as a whole responded to Sandy. But it felt great because Patch, the product Armstrong had founded and funded - sometimes over the screams of shareholders - finally seemed to be succeeding. What's more, Patch was succeeding a month after re-launching with a major redesign called Patch 2.0 - a redesign that had Armstrong's fingerprints all over it.
After that May 2012 earnings call in which Armstrong promised shareholders he would bring the division to profitability by the end of 2013, he got even more deeply involved with the product than he had been before.
Until then, Patch had relied almost exclusively on full-time and freelance journalists for content. It had a few thousand users blogging on the platform, but their content wasn't getting noticed by other consumers. Armstrong decided Patch needed to be more of a platform for user-generated content - more like YouTube, Facebook, or Tumblr. Then Patch would have more content and more traffic, with smaller costs.
Armstrong took feedback from Patch users whose kids played soccer and lacrosse with his kids, and started drawing what he thought the new Patch should look like on legal pads. In the Web design community, this is called "wire-framing," and Armstrong did a lot of it.
The person most responsible for turning Armstrong's sketches and ideas into actual websites was a Patch creative director named Abel Lenz.
Technically, this wasn't Lenz's job. Technically, Lenz's job was to come up with his own product ideas and designs for Patch. And he did do that, too. But mostly he tried to give Armstrong exactly what he wanted. And the problem with trying to give Armstrong exactly what he wants in a product is that he has too many ideas.
"He is extremely creative," says Susan Lyne, the CEO of AOL's Brand Group. "He knows that some of them are going to be useful and some of them are not. He doesn't edit them. He likes to brainstorm. He likes to think about the possible."
Lyne says she knows which of Armstrong's ideas actually matter to him because they are "the things he repeats frequently."
A former Google colleague of Armstrong's says this is an old trait of his. He says Armstrong is "unusually open to possibilities and that sometimes this gets him into trouble."
As Patch 2.0 neared its completion in the summer of 2012, Armstrong went to his board and told them, thanks to the redesign, he would have no problem keeping his promise of profitability to shareholders.
He was wrong.
The cost of winning.
Over the next 10 months, it became clear the success of Patch during Hurricane Sandy was an aberration.
Even as Patch traffic soared in the fall of 2012, the division continued to struggle with revenue growth. Online ads are sold ahead of time, and Patch wasn't able to monetize all the Sandy traffic. Despite Armstrong's Patch 2.0 redesign, costs stayed high. Worst of all, Patch traffic dropped from its post-Sandy peak.
It remained obvious to many of Armstrong's senior executives at AOL that Patch was not going to be able to reach profitability by the end of 2013 without serious cost-cutting. If Armstrong himself was beginning to realize this, however, he didn't show it. Armstrong's apparent stubbornness and blindness with respect to Patch, moreover, continued to cause significant friction between him and his senior team.
Executive turnover had always been a big problem for AOL under Tim Armstrong. During Armstrong's tenure, AOL has had two COOs, four executives in charge of media, four presidents in charge of advertising, three chief technology officers, four heads of public relations, three human resources bosses, and two general counsels.
Armstrong recognizes that AOL has gone through more turnover than normal, and he lays the responsibility for this on the executives he has replaced. AOL is a tough place to work, he says, and not everyone can cut it. Armstrong also says his current staff is an upgrade in talent. He's particularly proud of hiring Susan Lyne, the former president of ABC, and Bob Lord, the former CEO of digital agency Razorfish, who now runs AOL's ad sales.
Some Armstrong critics, meanwhile, put the blame for AOL's executive churn on him. He falls in love with people, they say, and then he falls out of love with them. His constant stream of ideas and passions leave his team wondering what is really important and what they should focus on. And his willingness to oust those who challenge him on projects he cares about has left some former executives feeling betrayed.
One of the executives most in Armstrong's ear about Patch was his chief operating officer, Arthur Minson.
Minson was quite vocal about kis skepticism about Patch. And in February 2013, Armstrong suddenly fired him.
Armstrong says that Minson left because AOL no longer needed a COO. Armstrong says Minson "was a tremendous CFO." Minson himself declined to comment.
Even with Minson out of the company, the pressure on Armstrong to fulfill his promise to make Patch profitable by the end of the year did not go away.
On the contrary, it heated up.
Armstrong's senior staff bore much of the pressure, and more of his lieutenants left the company. Some of Armstrong's Monday morning meetings grew testier. One AOL executive, Bud Rosenthal, seemed to frequently find himself on Armstrong's bad side. He kept asking tough questions about Patch.
During a public conference call with analysts to report AOL's first quarter earnings in May 2013, Armstrong responded to questions on Patch's progress toward profitability by saying, "No team on planet Earth is working harder than we are to get Patch to profitability, and that's a big focus."
Finally, in the summer of 2013, more than a year after Armstrong made his promises to shareholders, the realization appeared to finally sink in He decided to make Bud Rosenthal, one of the most vocal Patch skeptics, the CEO of Patch. This in itself was a big step. Instead of appointing a "yes man" to run the division, Armstrong had tapped someone who thought Patch needed major changes.
Then, on Wednesday, Aug. 7, 2013, Armstrong and AOL reported the company's second quarter financial performance. AOL reported 2% annual revenue growth, beating Wall Street expectations. It was the second quarter in a row the company had grown. AOL was spending $400 million to buy an advertising technology startup called Adap.TV. Thanks to that deal, AOL would soon top even Google as the top video ad seller on the Web. When the markets opened that morning, AOL's stock went up again.
This could have been one of Armstrong's best days as CEO. But he had some big unfinished business to attend to.
On the call, Armstrong explained to analysts that he and his team had divided Patch's 900 sites into three segments: profitable Patch sites, Patch sites that looked like they could become profitable by year's end, and Patch sites that did not look like they would be profitable by the end of the year.
Then Armstrong said a bit more than he intended to. He told the analysts that there was going to be a board meeting the next day, in which plans for that bottom third of Patch sites would be finalized. He hinted that AOL planned to give them away to other publishers in their markets. It sounded like there might be layoffs.
For AOL as a whole, this was a celebratory day. The agenda for Armstrong's day was to get on the phone with the Adap.TV employees and welcome them into the company. But, instead, Armstrong decided to head over to Patch. He felt he needed to be forthright with Patch employees about what was coming - especially after he had dropped so many ominous hints on the earnings call.
After the meeting, new Patch CEO Bud Rosenthal came up to Armstrong and said he'd noticed something odd while his boss was talking. One of the Patch executives, Abel Lenz, had been taking pictures the whole time. The picture-taking offended Armstrong. He'd been trying to be candid with his employees about their jobs.
Rosenthal went to Lenz and asked him not to take any more pictures during meetings.
The next day, a Thursday, Armstrong met with his board. At first it looked like the board would favor a plan to eliminate 600 of Patch's 900 sites, leaving just 300 towns. But Armstrong couldn't stomach this deep a cut. He favored cutting just 300 sites. Finally, the board told him it needed a week to review the options.
Eventually, AOL would decide to shut down every Patch site except for those located in 14 major markets. But that Friday, there was no news for Armstrong to share with Patch employees. Armstrong could have hung back at AOL's headquarters and celebrated two consecutive quarters of growth. Instead, he decided that since he'd promised to report back to them, he should. .
When he got to Patch headquarters that Friday, Armstrong was emotional. Cutting costs at Patch was the right thing to do - the only thing to do. In the months ahead, investors would reward him and AOL for the discipline the cuts showed, and send AOL's stock soaring. But that didn't mean it was easy. Especially for Tim Armstrong.
Armstrong didn't feel good. He'd founded Patch. He'd hired all of Patch's employees. He'd convinced his board to let him invest hundreds of millions of dollars in it. He still believed in the product. He regretted promising to make it profitable so soon. He felt that, given time, Patch would have turned AOL into a company worth many billions of dollars. He felt like he was quitting. He felt, in a word, awful.
But Tim Armstrong had changed since his Google days. Back then, he'd been unable to put the hundreds of sales people he hired through a painful, but much needed reorganization. He had put off the decision and then left the company before he had to make it. Now, however, Armstrong was ready to make the kind of hard, unpopular choices that he had to make if AOL was to succeed, no matter how bad they felt.
Armstrong began his speech. At the front of the room, he saw Abel Lenz - the man with whom he'd built Patch 2.0, which was now so obviously a failure.
Abel Lenz took a photo, something he had been explicitly told not to do two days earlier.
Armstrong snapped.
He said, "Abel, put that camera down right now."
He said, "Abel, you're fired."
And the room went quiet.
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A note on sources
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This story is based primarily on first-hand reporting consisting of dozens of interviews, including a few with Tim Armstrong.
Other people I spoke to are or were employed at AOL. Many of these people spoke on a not-for-attribution basis. Some spoke on the record. I have not identified many on-the-record sources because I did not want to allow for the process of elimination to identify others.
This story, being told in a narrative fashion, does not identify the sources of information for particular facts, including thoughts. I would caution readers against assuming that because I have reported a person's thoughts, that person is a direct source. A person will often share thoughts about pivotal moments in their lives with a large group of people.
As a part of the narrative, my story includes dialogue.
I am grateful to James B. Stewart's "note on sources" at the end of his book, "DisneyWar." That note helped me think about how to describe my own sourcing. In his note, Stewart describes how he sources dialogue. It's a perfect explanation, and I'd like to quote it and use it as my own explanation.
"As part of the narrative, I have included passages of dialogue. Dialogue- what words were said- is a fact like any other. It is not necessarily a quotation from an interview with me and I would discourage readers from inferring that one or both of the speakers is a direct source. Especially in today's world of instant communication, it is sometimes amazing how many people turn out to be privy to what others may assume is a private conversation. Many of the conversations reported in this book either took place before an audience or became known to a wide circle of people, often within minutes of their taking place. … In a few cases other people were listening in on speakerphones, extensions, or overheard conversations without one or both of the speakers' knowledge. Readers should bear in mind that, given the vagaries of human memory, remembered dialogue is rarely the same as actual recordings and transcripts. At the same time, it is no more nor less accurate than many other recollections."
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Bibliography
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Auletta, Ken. "You've Got News: Can Tim Armstrong Save AOL?" New Yorker. Jan. 24, 2011.
Del Rey, Jason. "At AOL Under Tim Armstrong, the Only Constant is Change." AdAge. Feb. 6, 2013.
Diamond, David. "In The Zone." Wired. May 6, 1997.
Lee, Edmund. "AOL's Patch Limps Toward Profitability." Bloomberg. Jun. 18, 2013.
Romensko, Jim. "LISTEN TO AOL CEO TIM ARMSTRONG FIRE PATCH'S CREATIVE DIRECTOR DURING A CONFERENCE CALL." Romenesko. Aug. 10, 2013.
Acknowledgments
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I'm grateful to Jay Yarow for eading this story and suggesting edits. Jill Klausen saved me with copy edits. Mike Nudelman made the great cover image and section headers. I'm grateful to to the people who took time out of their busy days to respond to my emails and get on the phone to talk about Tim Armstrong and AOL.