Cutting 2,000 jobs at AOL is a good start
Posted
Oct 15 2007, 02:23 PM
by
Kim Peterson
Rating:
It's been a long time since AOL was considered a serious competitor to Microsoft or Yahoo. The company has never been a threat to Google. I would say today's announcement of 2,000 staff cuts marks the end of an era, but I think that already happened.
Paring 2,000 from a workforce of 10,000 is significant, but it isn't enough. According to a staff memo by CEO Randy Falco, the layoffs will help the company continue its massive push into online advertising. AOL changed its strategy in August 2006 to focus on advertising and move away from the subscription Internet access business. The company has been slashing jobs since 2001, when it had 18,000 employees.
Certainly the cuts were necessary. In August, Time Warner pulled back its ad growth forecasts for the year. Its Q2 ad sales grew by only 16%, down from 40% for four previous quarters. And on the Internet access side, AOL lost 1.1 million paying subscribers. A lot of lines are trending down at AOL, and a massive layoff will help reverse that.
Analysts were not thrilled by the news. Pali Capital analyst Richard Greenfield wondered how AOL is going to remain relevant long term. He told Bloomberg that he doesn't understand the "sustainability and profitability" of the company.
Neither do I. By many accounts, AOL is a company in chaos, with a controversial new CEO, new corporate headquarters, departing executives and plunging morale. AOL tries out new strategies all the time, and most of them are unsuccessful. Adding to the mess are all the acquisitions AOL has made in the last couple of years. It bought video search engine Truveo in January 2006 for example, and waited 18 months to relaunch it.
Henry Blodget, who has been following AOL's turmoil closer than most, estimates that the cuts will allow AOL to maintain its current EBITDA levels next year, even taking future subscriber declines into account. The cuts aren't deep enough if all they'll do is just maintain EBITDA.
Why isn't the market more receptive to these layoffs? Time Warner shares are down 1% today.
