After Bartz, Armstrong Looks to Be Next

Yesterday, after two years as CEO of the ever-shrinking Internet giant Yahoo, Carol Bartz emailed employees, letting them know that she’d just been fired over the phone.

That call should have sent shivers down the spine of AOL’s CEO of two years, Tim Armstrong. According to some industry observers, he’s next.

There are, of course, many comparisons between the two beleaguered executives. Both Bartz and Armstrong were well-regarded in their previous jobs. Bartz was the pragmatic, tough-talking head of Autodesk, while Armstrong was the charismatic and highly effective U.S. head of sales for Google.

But both underestimated how hard it is to turn around a broken Internet company with complex, multidivisional, underperforming assets — a task that was “made more difficult by the fact that the best and brightest at both companies had already left before Armstrong or Bartz even arrived,” observes social media analyst Lou Kerner of Wedbush Securities.

Bartz was brought into Yahoo to cut costs, increase the company’s cash flow and focus on its underperforming assets and make them work. Armstrong, on the other hand, was brought in to take an underperforming asset, and find a vision for it.

“In a weird way,” says economist Paul Kedrosky, “both were kind of the right people for their respective jobs, but Bartz lacked support to make enough cuts to transform Yahoo into a cash-flow machine. She also faced the constant, nagging pressure that Yahoo shouldn’t simply be cutting costs but doing something world-changing at the same time.”

Armstrong, Kedrosky continues, is an “arm-waving, let’s-find-some-way-to-change-things guy. But the job is too hard. Other than if he’d been hit with lightening with the exact right thing to do, his playing product visionary is right up there with me doing that.”

If only Armstrong saw it that way, he might still save his job. Instead, Armstrong’s most ambitious idea, Patch — a compendium of online newspapers that target small communities and are supported by advertising — seemingly fueled the company’s overall loss of $11.8 million in the second quarter.

AOL credits Patch with 18 percent growth in domestic display ad revenue over the second quarter of 2010, but AOL may spend up to $120 million this year on the effort. Meanwhile, the company is running out of the time needed to justify the expense.

“Local is going to be big; I think everyone realizes that,” says Sameet Sinha, a senior analyst at the institutional research firm B. Riley. “But in this sort of capital markets environment, long-term projects aren’t given much leeway, especially a project like Patch that is much more people intensive than tech intensive.” It’s just “not something that should have been undertaken by a company the size of AOL.”

Even without Patch, the CrunchFund debacle may be enough to turn the tide against Armstrong. (Armstrong approved a $10 million investment by AOL in CrunchFund, a $20 million VC fund launched by TechCrunch founder Michael Arrington, and initially said Arrington would continue to write for TechCrunch while making investments. After the blogosphere screamed conflict of interest, an AOL spokesperson said Arrington would no longer write for TechCrunch; now Dan Primack of Fortune is reporting that Arrington has been fired from AOL. )

“This whole TechCrunch issue has definitely brought down my level of respect for Tim,” says Sinha. “I think it’s been evident since at least the last quarter that business processes aren’t in place at AOL. With this poorly managed process, I think he’s shown that people processes aren’t in place at the company, either.”

“It’s like ‘Days of Our Lives’ as reenacted by AOL,” says Kedrosky. “The CrunchFund and ethics issue aside, it just reminds people that this organization is messy.”

So what now? “Tim Armstrong has six months at most,” says Sinha. “Especially with Bartz’s departure, pressure has increased on the other CEOs in the tech industry that haven’t performed for shareholders. He should definitely be thinking, ‘Forget this, I’m going to sell the company.’”

Kedrosky agrees. “I think the Hail Mary — still rooted in some semblance of reality — is AOL [entering into] the business of collecting bids, cutting to the bone, separating out its non-performing assets and taking those that generate cash flow and … selling them off. That has to happen in six months.”

As for Armstrong, “the instant that happens, Tim is gone,” says Kedrosky. “He’s a pleasant face to put on a transaction like this, and that has to be among his highest obligations. But if he doesn’t complete it, he’s gone. If he does, he’s gone.”