AOL's Armstrong Tells CNBC He Is More Interested In Nichebusters Than Blockbusters (Full Transcript)

On the eve of AOL’s official reemergence as an independently-traded company (although in reality its shares are already trading), CEO Tim Armstrong gives CNBC’s Julia Boorstin a lengthy interview on his message to investors and where he hopes to take AOL. He is fully aware that cost-cutting is only going to take AOL so far and he that investors are concerned whether the “newer business [is] gonna be able to overtake the declining business.” But he thinks it is just a matter of execution and promises to show investors the “metrics,” “changes,” and “great products and services” which will drive AOL forward.

His focus is on making brand advertising work on the Web and marrying that to targeted content. He notes that spinning off from Time Warner will allow AOL to escape the blokcbuster mentality which pervades the media company. Time Warner, he says, is “a company that can actually make the hits business work, you know, at scale. I think at AOL we would use our cash slightly differently” with a more “focused internet strategy . . . precisely done.” Sounds like a nichebuster strategy to me, something I’ve advocated that Time Warner adopt in the past (I define a nichebuster as content targeted at a large niche audience). Armstrong elaborates on this further:

And we– like to say here we’re building the world’s largest niche, you know, media business. And niche meaning at scale. We wanna have a lot of properties with a lotta users on them. And then, the second piece is really that fragmentation is our friend. As the internet becomes more fragmented, when– if you can produce great content in niche areas and then really leverage the distribution on the internet, you’re looking at a very high scale, high ROI, return-on-capital business.

He’s spoken about how he is preparing AOL for a fragmenting Web in the past. Going niche is a valid strategy, and ironically may even set AOL up to become the Time Inc. of the 21st Century.

Armstrong also talks about what he learned at Google, namely to capture great ideas from employees and to build great consumer products:

I think one thing I took away from them is capture all the employee ideas, you know, and make sure you can execute them. And then two is I think I took away the focus on the consumer business is you know you have to make great things for consumers, and if you don’t, you end up paying the price for that.

CNBC is starting to put up clips from the interview on its site. The first one is embedded below. But we also have the entire raw transcript under the video.

JULIA BOORSTIN: Thank you for doing this interview again. So– so, why is it important on the eve of AOL, you know, AOL’s big IPO, why is important for AOL to be a standalone, publically-traded company?

TIM ARMSTRONG: Sure– first, thanks for the interview. And– I think it’s really important for a couple different– main reasons. I think, number one is, you know, the internet is a very competitive place, and I think whether it’s hiring employees or whether it is, you know, competing for M & A, those type of things, I think that we need to have a very clear, clean focus and act like an internet company. And I think that’s– that’s one reason.

I think the second reason is that we would probably use our resources, you know, differently. I think inside of Time Warner which has been a very successful company and a company that has actually, I think, turned out to be a company that can actually make the hits business work, you know, at scale. I think at AOL we would use our cash slightly differently and the– and overall resources of the company. So– I think what you see from us is a very clear, focused internet strategy, and a strategy both on the business side but also on the use of resources and cash side which will be, you know, precisely done. And I think that’s– you know, a couple of the main reasons why it makes sense.

JULIA BOORSTIN: You just finished your road show to investors, what was your message to investors about what the value is in this new AOL?

TIM ARMSTRONG: Sure, so I think there’s kind of– you know, quick five point bullet points for investors. I think number is, you know, I say the management team because the management team, I think– competing in the internet space takes deep knowledge– you have to understand the network effects. That’s one.

I think the second– one is really focused on the AOL brand. I mean, we have a global brand, it’s a great starting point for us. Not many companies have global brands. I think third is really kind of a clear strategy. And I think the strategy we’ve been executing since July 24th which is really content ads and communications is a big asset for us, and we’re making progress.

And then, the– the fourth reason I think comes down to– really, in essence, what the company’s gonna spin out as. So, we’re gonna spin out with no debt, you know, with some resources to continue to move forward. And I think it’s a great position for us to be in the turn around. The last point is I just say we’re serious about the cost structure, is that this business, we announced the fact that we’re gonna have a layoff of up to one third of the employees. So, I think when you look through those five bullet points, the company’s in a position as long as we execute, and that’s really our job to be successful.

JULIA BOORSTIN: So, what kinds of questions did you hear from in– investors on this road– road show?

TIM ARMSTRONG: Yeah, I think some basic questions which are what– what’s AOL’s business. I think people haven’t gotten updated in a fair amount of time in– in detail on what we’re doing. I think they also wanted to know, really, about the strategy. I think if people– investors are betting on this company, they’re betting on the fact that we have a clear strategy and we have clear execution.

I think they also wanted to know what we were planning on doing with access business and other parts of the business that people probably historically, you know, know us for. But– in general, I think the investors– are very interested. I think that they’re expecting execution and wanna see execution metrics. And overall, I think there was overwhelming support for the strategy we have.

JULIA BOORSTIN: What are investor’s biggest concerns, and what are you– what are your biggest concerns? What do you think your biggest challenges are right now?

TIM ARMSTRONG: Right, so I think– investor’s biggest concerns, I think, come down, you know, what– what’s really here at the business, there’s a business that’s– that’s large, historic and declining. There’s a newer business which I think they’re tryin’ to understand and see. So, I think their concern is is the newer business gonna be able to overtake the declining business?

On my plate, I think I have a different set of, you know, concerns because I believe in the new business. I think my concerns are really makin’ sure that we execute. I think, you know, we’re running this company much differently now, we’re very focused and very metrics based. And I really wanna make sure we execute the strategies, they’re gonna move the metrics and become transparent for– for investors.

JULIA BOORSTIN: Now, the AOL Time Warner merger a decade ago was considered– a debacle to be fair, and a deal that didn’t work out the way it was supposed to. How long do you think it’s gonna take for you to live that down and for the company to live that down?

TIM ARMSTRONG: So, I– I think number one is, you know, we have a big opportunity to change the brand almost immediately. I think with the focus and energy we’re putting around the new strategy, I think people are actually starting to see the changes at the company. That’s number one.

And number two is, I think as you look forward for this company, you know, is the turnaround gonna take one year? No, it’s gonna take longer than one year. Is it gonna take– five years? I hope not. And I think within that sorta time frame, I think you will– consumers and the business community will see us do some incredible– products and services, I think, that were really meant for the future of the internet.

And I think that’s what it takes to change the perception of the brand is you have to be authentic about it. You can’t just tell people you’re gonna change, you actually have to show people. And as I say internally all the time is we live in the “Show Me State”. Now, show me the metrics, show me the changes, show me the great products and services.

JULIA BOORSTIN: Now, you– you’ve rebranded the logo. You’re still keeping the name AOL, but it’s a slightly different look, what does the AOL brand stand for now? What do you want it to stand for?

TIM ARMSTRONG: Yeah, I think we want it to stand for creativity. I mean, I– at the end of the day, this business is a business that’s built on our employees, and one of our board members, Jim Stengel, you know, likes to say and I– I learned this from him while I was at Proctor & Gamble, he says, you know, brands are really built by the people who work on them, and if the people who work on them aren’t enthusiastic and they’re not doing their work– the best work they can, that’ll show up in the brand.

And I think there has been a sea change at AOL. I think we have employees who are enthused now. Some of the products we’re gonna be– I think launching in the next three months are probably some of the best products the company’s done in a long time. And at the end of the day, it’s about the enthusiasm. I think our brand is about creativity, and I think that creativity is a direct– reflection of the employees enthusiasm.

JULIA BOORSTIN: Now, you have had to slash your employees, I know you’re asking for 2,500 volunteers of people to take packages and leave, how important are these layoffs in restructuring?

TIM ARMSTRONG: Yeah, I think, you know, first of all, I think the restructuring is about reengineering. I think the company–when I got here was in state where, you know, we had the access business which is declining, and the advertising business which held– holds huge promise and the content business.

But is the company totally structured correctly? The answer’s no. And I think, you know, a lotta people looked at the announcement we made as, “Oh, they’re just purely cost cutting.” You know, I’ve been very specific about this since I started as I did the hundred day road show. You know, met the thousands of employees, all the employees actually, all 7,000, met a couple hundred partners externally.

And I think in July we locked the strategy down. And what you’re seeing from use, you know, in relation to the cost cutting is not really cost cutting, it’s reengineering based on the strategy. And you know, employees first is our internal model, and our business, you know, model is really about strategy first. So, that’s what– that’s what the changes in employee base are about.

JULIA BOORSTIN: Now, you came from Google considered best in breed of– of internet companies, what did you learn at Google that you’re bringing here?

TIM ARMSTRONG: Yeah, I think I learned a lot at Google. I would just say at– you know, very personal level, I think working with some of the executives at– at Google, especially Eric Schmidt and Larry and Sergey, I think, you know, I’ve learned a lot about Google– Google doesn’t get credit for the company they run, they run an excellent internally driven, you know, company that is able to capture employee ideas.

So, I think one thing I took away from them is capture all the employee ideas, you know, and make sure you can execute them. And then two is I think I took away the focus on the consumer business is you know you have to make great things for consumers, and if you don’t, you end up paying the price for that. So, I think those are the two main things. You know, maybe a third thing with Eric is, you know, how to– how to be a CEO. I think Eric spent some time with me in the transition here, you know, kinda helping me think through what some of the challenges are in the chair and how you deal with them.

JULIA BOORSTIN: Now, Google’s obviously the search ad giant. You said you wanna– you want AOL to be the display ad giant, to really dominate that space. How are you gonna do that?

TIM ARMSTRONG: Yeah, I think one is, you know, our– our– display business starts with creating great consumer product experiences and having a great ad network. And I think, you know, similar to how other people have been successful on the web, I think it comes from building very, very strong scaled, you know, technologies which this company can do and is doing.

And then, number two is, I think, really understanding the brand market– marketing space, the display ad space is– there’s a set of solutions in the marketplace which are, you know, very Silicon Valley based, you know, type solutions, and we’re taking Silicon Valley type mentality around the platforms but mixing it with what I think the big brands in the world want, which is they wanna put their products and services next to the world’s best content experiences. And we’re– that’s what we’re laser focused on doing.

JULIA BOORSTIN: But so, what does that mean you’re actually doing for your advertising clients? Is it branded content? What does this actually mean?

TIM ARMSTRONG: Yeah, so we’re doing– I mean, we do a spectrum of things for– for our clients. I think one is we do great branded content. So, if you look at some of the properties we have, like a MovieFone or a black voices or an asylum, asylum’s you know, largest content property on the web for young males, you know, we’re able to take big brands and integrate them in branded content experiences.

I think also some of those customers want broad reach and to reach as many consumers in their target demographic. So, we use the technology that was built at and we are able to offer branded engagement plus very high reach, you know, across the internet. And we have the largest reach– ad network in the U.S., so that’s very helpful.

JULIA BOORSTIN: And there’s obviously so much competition in this digital ad space between Microsoft and Yahoo and obviously Google, how does AOL really distinguish its advertising product, and how do you compete in that space?

TIM ARMSTRONG: Sure, so I think– number one is I think on the fact that we produce 80 percent of our content ourselves, I think we’re the only large internet company that produces that much content. And I think when you own and are able to operate that content, the advertisers actually are very attracted to it.
So, I think, you know, on a head to head basis on the branded engagement side of advertising, I think AOL can beat anyone in the internet space right now on that, and I think we’ll continue to– to scale that. And then, two is we have some of the best display and brand technology– in So, I think the mixture of owned and operated content with high scaled– technology is– is a winning combination for us.

JULIA BOORSTIN: You say this wave of the internet is all about content, where’s the money in content right now?

TIM ARMSTRONG: Yeah, so I think the money in content– first of all, I think, you know, this wave of the internet coming up in the next decade is gonna be about content because if you look at the size of the distribution platforms out there, the Googles the Facebooks, the Twitters, you know, those things work and operate on people’s content.

And I think we see that as a big gap in the marketplace where the– people can produce much more content to be much more useful. And I think the second piece of where the money is, the money comes, right now, I think, from– mainly from advertising and from really having specific types of programs for advertisers.

If you’re Proctor & Gamble with the Tide brand, you know, the question is can you spend 20 million, 30 million dollars on-line in a way that’s actually not just scaled in reach and technological, but also speaks directly to the consumers. At the end of the day, what Tide expects from us or Proctor & Gamble, is when someone walks down a grocery store aisle, you know, our products and services need to be able to help that– the consumer distinguish why you pull the Tide box off the shelf. And I think our content and our community– communications areas are able to do that for those customers.

JULIA BOORSTIN: And you have so many– you have 80 different brands, you earlier mentioned that you wanna have hundreds of different content brands on-line. Is the idea to have different niches that serve different demographics? I mean, what is the strategy to creating all of these different brands?

TIM ARMSTRONG: Sure, so the strategy is– twofold. One is on the platform side of creating content, I think we’ve been work for the last five months on a pretty significant– platform which allows us to create very high quality, very high scale– content which we can then grow– and got from 80 to 200 to 300 properties.

And we– like to say here we’re building the world’s largest niche, you know, media business. And niche meaning at scale. We wanna have a lot of properties with a lotta users on them. And then, the second piece is really that fragmentation is our friend. As the internet becomes more fragmented, when– if you can produce great content in niche areas and then really leverage the distribution on the internet, you’re looking at a very high scale, high ROI, return-on-capital business.

JULIA BOORSTIN: There’s so much content out there on the web already, every newspaper, every magazine, every blog out there, do you think the content market is saturated at all?

TIM ARMSTRONG: You know, I look at the content market probably exactly the opposite. Investors asked us that question saying, “Isn’t there a lotta content on the internet today?” And you know, the example I use is– when you think about if you’re going to look at a piece of content, I mean, what you see on the surface is the content itself. What you don’t see is the structured data and how the content was produced, how it was distributed and those things.

And my guess is there’s a limited subject matter of content that’s been produced up to this point, and with more technology and more scale behind it, we can have much deeper, richer, you know, more engaging content. So, you know, I think what other people see as a giant web of tangled content, I think we see as our biggest opportunity.

JULIA BOORSTIN: So, you– I hear you referring to, you’re new content management system, you say this– using data is gonna help you enable– help enable you to create more better content that’s gonna be able to get higher ad rates it sounds like. Tell me what is and what the strategy is here.

TIM ARMSTRONG: So, C does– some very specific things. One is it leverages a lot of internal data here plus data that we license to understand what type of content to producer. And on a very simplistic way from testing the system this fall, we figured out that Halloween actually doesn’t start the third week in September when people are tryin’ to find costumes, you know, that families and– and people are looking for– costumes and Halloween information in August, around August 22nd.

So, we were able to move all of our Halloween content a month earlier and see a big return in that. So, that’s why data is important. The second piece is it allows us to add, you know, tens of thousands of content producers. So, we have about 3,500 content producers today, you know, we expect that to go to tens of thousands over the next couple years. That’s important because once you do that, you’re able to create, you know, mass-scale content that’s very targeted and very timely.

And then, the third piece of what C does is on the distribution side, it allows us to distribute content not just to our platforms, to other people’s platforms as well. And the money that we’re gonna make in C, first of all– some of the content we’re gonna produce is probably non-commercial. You know, we’ll produce things that are good for the world.

And– I think our second piece is the ad system that we have, you know, is we are– we have a church and state on editorial, but we are making the ad system smarter and smarter with the content– from the data that we use from the content producers and the distribution to make it smart, we think the ad model can be moved further underneath the content model and offer, you know, better use– end user experience and advertiser experience.

JULIA BOORSTIN: So, effectively, you’ll have– advertisers have more influence over what kind of content is produced?

TIM ARMSTRONG: No, I think it’s just the opposite actually. I think that– we’re using both our editorial human resources as well as the data resources to understand what content to produce. I think that the advertisers would love to know why we’re producing content. They don’t need to influence the content production. So, I think you’ll see us with a very, you know, clear church and state way that we produce content, but le– giving advertisers more inclination to why the content produces, where it was sent, how it was sent.

JULIA BOORSTIN: So, you’re marrying art and science in content creation–


JULIA BOORSTIN: What is the net effect for your business?

TIM ARMSTRONG: Right, so the net effect for the business is I think people should expect us to, you know, dramatically scale the amount of content that this company produces– really influence the quality of content on the internet. And I think the third piece, which is the business model piece of it, is you know, how do we actually make advertising in this business model work very, very well.

I mean, I think for the last decade, I think every sentence has– for advertising has ended in the word search. You know, people are enthralled by search and have been. And search is a great business. But the reality is the next 50 billion, 100 billion dollars that’s gonna move to this space, a lot of is– based on brand and brand advertising which traditionally, I think, a lot of the traditional companies have done well and the internet companies, you know, are now taking very seriously. And that’s what the benefit is for us.

JULIA BOORSTIN: The advertising business has really suffered of the past year, 18 months, double digit declines across the board, do you see the ad market coming back?

TIM ARMSTRONG: Yeah, so I– I think there’s a lot of life and energy in the ad market right now. Specifically, I think we see customers reengaged in planning and buying and getting very active. I think one thing that’s very beneficial for our– business and for other internet businesses, as the recession happened, I think a lotta customers went into conference room and says where are consumers and what works?

And I think when they come out of the recession, they’re seeing that digital media is an incredible place for them to continue to migrate ad dollars. So, I would– I’d expect, you know, robust growth over the next few years for advertising.

JULIA BOORSTIN: Rupert Murdoch has talked a lot about charging for content and implementing– a pay system on his news websites. Do you think there’s value in a pay model for your type of content?

TIM ARMSTRONG: Well, I think it’s been a pretty truism to say you can’t bet against Rupert because I think he has been really successful. So, I think when Rupert has ideas like that, I think people should pay attention. I think second of all, is I do see value there. I think that there are pieces of information and content that, you know, can be paid for and– and probably will be paid for.

You know, for our business model, version one is really focused on advertising. I think we actually have– a fairly large payments platform in the access business, and millions of people who pay us monthly subscriptions. So, you know, could AOL get into that business? I think that’s something we’d be interested in– in looking at.

JULIA BOORSTIN: Now, I know you’re– investing a lot in hyper-local content, and you’ve described this as a white space, but local advertising has suffered far more than national advertising over the past year. Why do you see value in local?

TIM ARMSTRONG: Yeah, local’s important for a few different reasons. I think one is it’s a very defendable, you know, space. I think that consumers in their local area like local content, like local community– and I think on the advertising side of it, I think– you– you know, people see what’s happened in the newspaper business and other areas where local has kind of gone– has declined.

The reality is– is it more important or less important to get people local information– around– advertising. I think it’s probably more important now than it was before. So, the question is who’s gonna figure it out, and who’s gonna capture that, you know, market. So, we see it as a big white space, and we’re aggressively going after it.

JULIA BOORSTIN: Now, you have all these different content businesses, but you’re also still involved in communications. And AOL started off with a definitive Instant Messenger. Where does Instant Messenger, you know, and I.C.Q. fit into AOL’s business now?

TIM ARMSTRONG: Sure, so I think at a macro level, we’re betting that people are not gonna carry around ten devices and also log into 15 or 20 applications on the web. So, I think we really see the future of the internet– communications as based on unified messaging. So, I’m a consumer, I come on-line, I’d like to log into one application that allows me to see all my social networking traffic, all my e-mail, all of those things. So, we launched a product called Lifestream this summer which is version 1.0 of what I just described. And I would expect us to, you know, continue to launch more and more products in this space over time.

JULIA BOORSTIN: But how does that fit with the content business?

TIM ARMSTRONG: Oh– the content business specifically, I think the– the messaging and communications business offers a great opportunity for us to recirculate– you know, information to people. So, you know, a lotta people who go into e-mail every day like to look at content as well. And one of the more successful things we’ve done is figured out what type of content to give people as they’re logging into their e-mail– boxes.

And I think the other piece is, you know, people love to share content. So, if you think about a great way to distribute content, AIM, I.C.Q., you know, the e-mail property we have, there’s a great distribution mechanism for us to let people share content.