AOL CEO Tim Armstrong (pictured) said in a memo to staff (below) that the company is looking to lose 2,500 workers, or a third of its total staff. He'll be forgoing his own 2009 bonus, and is offering executives up to nine months pay if they volunteer for buyouts, according to Business Insider. Interestingly, rank and filers are being offered a weaker deal than their recent colleagues over at Time Inc.; AOL will pay them three months severance, whereas Time Inc.-ers get that plus two weeks for every year of service. Apparently unions are nice things to have in situations like this.

As it prepares to offer shares to the public next month, AOL has been on a diet plan in other ways, too:

• After steady increases, ad revenue from a deal with Google started falling this year, according to Peter Kafka at All Things D. The deal provided $700 million in ad revenue last year, about one third of the total, but was off $42 million in the most recent quarter.
• AOL surrendered bustling celebrity-news site and cable network TMZ to Time Warner; Tim Armstrong said as recently as July that he hoped to "actively" discuss whether to retain TMZ with Time Warner and that "‘If the value of TMZ increases, it's a really good thing for us."
• AOL may sell MapQuest, according to Kara Swisher at All Things D.

Pic above by Yaniv Golan.

Armstrong's memo to staff:————-

AOLers –

"Employees First" is the way that we have run the company since April and that mantra is something I take very seriously because our company is a collection of people and our brands are the work of our teams. We started by working together to determine AOL's strategy, then the correct structure for the strategy, and, as we have discussed, we are now faced with making sure we have the correct cost structure for the strategy. You have seen daily and weekly updates on Project Everest and many of you have been involved in trying to align our resources to maximize AOL's opportunity.

AOL's cost structure is something we have worked on for the past four months, and we have spent hundreds of hours reviewing ways to fix the cost structure as well as the revenue growth engine. As we are coming to the conclusion of this work over the next few weeks, it is clear that we will need to have a significant reduction of costs at the company and across almost all functional areas and geographies. Headcount costs are going to be a majority of the cost reduction recommendations coming out of Project Everest.

As I mentioned in our last Project Everest update, the idea for a voluntary layoff was suggested and we agree that it is an option that gives people more choice and decision-making ability instead of waiting for the final cost recommendations and involuntary layoffs. Starting December 4th in the United States and ending a few days after we spin out from Time Warner, we will allow employees to choose a voluntary exit from AOL. Additionally, tomorrow we anticipate beginning the communication process for voluntary layoff programs in certain international locations. We will be looking for up to 2,500 volunteers. For context on the target volunteer number, over the next several months we will be looking to reduce approximately one-third of our overall workforce at the company. We will need to do an involuntary layoff if we do not reach the target numbers through the voluntary option.

The reduction in costs is aimed at making AOL competitive for the future of the Web and it will allow us to focus the company on growth in the non-access areas of the business. After the cost reductions, we will have a company that is aligned and structured to drive our strategy in a competitive way. The number of potential reductions isn't aimed at getting us through 2010; it is aimed at resetting AOL at the correct baseline for the future.

As a member of our team and the person who takes accountability for the results of the company, I am making the decision to forego my 2009 bonus. That decision is a personal one and is not a sign for the future payout of the overall bonus plan for employees. That plan is based on performance and overall company outcomes and it will be management's recommendation to the compensation committee of the Board to approve our performance-based bonus payouts for 2009. These are challenging times and today's news is difficult. But every day we are making changes and progress and we are on our way to re-engineering AOL for success. – TA

Armstrong, the former Google advertising chief (pictured), jettisoned some top lieutenants from AOL, the internet conglomerate, last month. Beyond that, he's believed to be planning major job cuts as part of a sweeping reorganization of the company. "AOL is not going to change itself by incremental movements," Armstrong recently told PaidContent. Asked if this meant "large cuts," he talked about going "deep into the employee organization... to come up with ways to structure the company... I would expect announcements about that by early next year."

Early next year would mean just after the spinoff from Time Warner, assuming it goes forward as expected late this year. An AOLer who attended a recent internal "Town Hall" meeting on the restructuring, dubbed Project Everest, confirmed the layoffs are planned for post-spinoff.

One explanation we've heard for that timing is that Time Warner CEO Jeff Bewkes didn't want layoffs taking place while AOL was part of his company. That makes some sense — layoffs typically carry a price tag, and Time Warner presumably doesn't want to take the hit for a move that will benefit another company over the long term. Time Warner isn't taking on debt as part of the transaction, our AOL tipster said, which jibes with the media conglomerate's statements that it is AOL that might load up on debt as part of the spinoff.

But a delayed deep restructuring means uncertainty for investors considering what to do with AOL shares in the earliest days of tradubg, which in turn means a potentially depressed price. A weak re-debut for AOL shares would not bode well for a company that has already had more than its share of struggles. Then again, if anyone can sell uncertainty, it's a consummate salesman like Armstrong.

UPDATE: 3:38 pm ET: Post updated with comments from an AOLer.

The Wall Street Journal's Matthew Karnitschnig imagines the company, including the still-proud journalists at Time Inc., as the pet of Rupert Murdoch, or perhaps of some dreary cable television provider like Comcast or DirecTV.

Maybe. As troubled as the AOL division was, it at least hypothetically had growth potential Time Warner's remaining divisions don't offer. But it's safe to say Time Warner CEO Jeff Bewkes (pictured) isn't going to sell to Murdoch without some ironclad protection against getting shanked by Murdoch's MySpace CEO Jon Miller, who Bewkes has repeatedly screwed over.

In retrospect, AOL's deal to acquire — and then be run by — Time Warner marked the end of a century when old media conglomerates were at their peak. The merger, valued at $182 billion when it was announced, was the largest in U.S. history. It is also arguably the most disastrous in history. The combined value of the two companies — both inflated by the dot-com bubble — was $350 billion. Today, before the spin-off goes through, the whole shebang sports a market cap of just under $28 billion.

Now that the struggling old media company is parting ways with its fast-shrinking internet toy, the media's hand-wringing over the deal nine years ago looks absurdly hubristic in retrospect.

Here are some quotes from early 2000, after the deal was announced (and about a year before it was consummated):

• New York Times: A "merger of tree-snapping behemoths... the Godzilla of the Internet... wed the King Kong of content. It is a natural time for the other denizens of the jungle to wonder what the future will hold for the colossal couple and the world they inhabit."
  
• USA Today: "It's one of those rare events that seems to change the world overnight... We're shocked... "
  
• Newsweek: "AOL Time Warner will be unchallenged in its online customer base and hold vast cable-television assets."
• Regional telco SBC Communications, as quoted in CBS Marketwatch: "The merger will establish, through a web of equity and contractual interests, one interlocking conglomerate with control over both the high-speed pipes consumers use to connect to the Internet and the content they access once they're online."
• Salon, April Fool's Day: "AOL Time Warner announced Friday that it had acquired France."

There were some pessimists; a columnist named Paul Krugman wrote that only time would tell about the wisdom of the deal, and that it's possible " some big businessmen have just made a very big mistake."

Instead of fearsome tentacles everywhere, Time Warner is now left with the old-line business it was in before the 2000 deal. Except those assets — cable networks, a movie studio, magazines — now face more obstacles to growth than they did eight years ago.

AOL chief Tim Armstrong, the former Google sales chief, finally has his own company to run; it remains to be seen whether he can reverse AOL's steadily declining advertising revenues. But it's Time Warner that's left with the tougher job: Proving media conglomerates can still post impressive growth amid the rise of online media consumption.

Falco and Grant were almost instantly hated when they arrived at AOL's Dulles campus — partly because Time Warner CEO Jeff Bewkes badly mishandled the exit of former CEO Jonathan Miller. (Miller is now a venture capitalist, and both his name and Armstrong's came up as candidates in Yahoo's CEO search.)

Armstrong, head of Google's North American ad sales, seems like the best possible man for the job — and with Google's shares hovering around $323, down more than 50 percent from their peak, and AOL at the nadir of its tumultuous existence, it seems like a good time for him to prove what he can do.

He benefits from an easy comparison: Falco's reign at AOL, where the company's notional value sank from $20 billion to a fraction of that, will go down in history as one of the worst reigns as CEO at any company, anywhere.

But what is Armstrong going to do? He'd never have left his cozy perch at Google to oversee AOL's further decline. Let's assume that's not in the cards.

The best indicator of Armstrong's preferred strategy is not the one he pursued at Google. Based primarily in New York, Armstrong oversaw an agenda set by the geeks in Mountain View. To keep him on board, Google's top managers allowed Armstrong use his Google-IPO wealth to make several startup investments on the side, even when they posed a conflict of interest.

One company, Associated Content, run by Armstrong's college roommate Luke Beatty, lets amateur publishers post content on the Web and get paid a share of the advertising revenues. Another, Patch, is building local news sites with real journalists behind them, in competition with the New York Times.

It's not clear if Time Warner, which is stricter about this kind of thing, will let Armstrong stay involved with his side gigs. But what they spell out is a guy who's itching to be a media kingpin, not the boss of an army of programmers.

What that likely means: The future of AOL will rest in its blog-heavy MediaGlow division, while Armstrong works his Madison Avenue connections to rebuild AOL's slouching ad sales. If he makes it work, it will be a triumph over his old bosses at Google — the ones who believe in the alchemy of algorithms over the hard work of creating content that attracts an audience.

And not just regular sad, but emoticon sad. ":(", he wrote on Twitter:


Fitting that Case, whose company popularized instant messaging, is using IM lingo on Twitter, a service his former company could have built in-house with a trivial amount of effrot. (Imagine if those IM status updates, instead of being displayed on a buddy list, were broadcast to the Web.) It's an example of the "lost decade" Case refers to: Years of languorously chasing deals instead of pursuing innovation.

Yet his plaintive tweets obscure the issue: Case oversaw AOL for more than half of this "lost decade." After AOL bought Time Warner in 2001, he became chairman, and stayed on for a contentious two years. He remained on its board for another two and a half years. Why is he sad when he should be mad — at himself?

Unlikely, save for one determined Atlanta fan with a taste for hip-hop cartoons. Superdeluxe's staff was laid off in May, but it took the Time Warner subsidiary seven months to move a small portion of its video library over to AdultSwim.com and shut the site down.

Turner isn't the only one finding it hard to get a laugh. Funny Or Die, which has never matched the popularity of "The Landlord," the bossy-baby clip from Will Ferrell, has morphed into a collection of cooking videos and videogame walkthroughs. Heavy.com is in management disarray, and is trying to make money on its advertising network rather than funny videos. eBaum's World, bought by the older brother of Google founder Larry Page, is entwined in a baroque financial disaster. And JibJab, famed for its political-satire musical numbers, seems to make more of its money through serving as an advertising agency for the likes of OfficeMax and Honda.

Why the serial failures? One could point to the struggling market for online advertising, or sponsors' unease with the racier fare preferred by the young male demographic they're hoping to reach.

But I think it has more to do with the nature of humor. Telling someone that they're about to hear a really funny joke just raises expectations. A website dedicated to laffs will find its viewers inevitably drifting away as the gags go flat. Sad as it is to say, people go to YouTube prepared to be bored — and then they're delighted to find something mildly amusing, becauses it's so unexpected. There's no business to be built around such idle surfing — but it's the very nature of how people get their laughs.

The real story: Falco freely admits he knows nothing. "I don't know anything," he told Carlson. Who's Yahoo's next CEO? "I don't have any idea." Falco, the boss of a fallen company that is nonetheless one of the largest sellers of advertising on the Web, is out of the loop, clueless, unplugged. He has no bits of gossip to trade one one of his biggest competitors, no spin to offer. Why should he? Time Warner has plainly put AOL up for sale behind Falco's back; Falco is just punching the clock as he presides over AOL's disassembly.

What's odd is that Time Warner CEO Jeff Bewkes isn't getting more criticism for AOL's numbers. As the head of HBO, he was one of a handful of Time Warner executives who loudly opposed the AOL deal. But enacting Time Warner's revenge on AOL by driving the business into the ground seems a strange way of making things right with shareholders.

Bewkes's hand-picked boss for AOL, former NBC executive Randy Falco, has been a complete disaster — a short-timer waiting for the company to be sold. Bewkes and Yahoo's Jerry Yang have been holding desultory talks on selling AOL to Yahoo. But Bewkes's negotiating position is considerably weakened by these results. Why didn't he sell sooner — and when will he pay the price for mismanaging AOL?

That sent Yahoo shares dropping twice as fast as the tech-heavy Nasdaq index, a sign of shareholders' displeasure at the idea of paying that much. 24/7 Wall Street thinks that anything more than $5 billion will be viewed as overpaying. Growth in AOL's advertising business is slowing dramatically, as the Internet-access business continues to decline.

The only part of AOL that anyone seems interested in is its online-advertising network, born as Advertising.com and recently relabeled Platform-A; Yahoo, too, fancies itself an advertising broker, in imitation of Google's hugely successful AdSense program, which places ads on third-party sites and gives Google a cut of the resulting fees. AOL's Web-publishing businesses? The most-trafficked ones are duplicated by Yahoo's own, more successful media sites in area like sports, news, and finance.

And then there's dial-up Internet access, a business no one seems to want. Liberty Media might flip its shares in Time Warner for the business, but only at a bargain price. Yahoo might take it in a package deal, to save the complication of a split, and try to trade the subscribers to someone like Verizon or AT&T in exchange for a long-term advertising deal.

So who gets cut? Either Time Warner's shareholders, or Yahoo's, depending on the price that's paid. This deal seems likely to get done, if only because it becomes more embarrassing the longer it takes. But someone's going to end up with their fingers sliced.

It's as if he thought that playing a game of buzzword bingo would masquerade as strategic thought. A television salesman by trade, Falco was plucked by Time Warner CEO Jeff Bewkes from NBC Universal to replace Jon Miller, in a universally derided move. A commonly held belief among insiders: Falco and Bewkes thought AOL would be sold off by now, with Falco moving on to some role at Time Warner's film and television properties. AOL has continued to embarrass. And so has Falco. The only question is which exit will come first.