By Zachary A. Goldfarb and Sam Diaz
Washington Post Staff Writers
Tuesday, September 18, 2007
AOL, the Dulles-based Internet pioneer, yesterday said it was moving its headquarters to New York, transferring the leadership of a company that fueled the growth of the Washington area's technology industry over the past decade.
The company said that while senior executives would depart for Manhattan, most of the 4,000 employees at the Dulles campus would remain. The shift is the latest step in the company's transformation from a provider of dial-up Internet access to one focused on online advertising.
AOL has spent the past year or so buying several online advertising firms to pitch products across a variety of technology platforms, whether they be Web sites, mobile phones or Internet videos.
"The move is really a realization that advertising is becoming an enormous part of our business," Randy Falco, chairman and chief executive of AOL, said in an interview. He added that New York is the center of the advertising universe and "it's critically important for us" to be there.
Local technology executives said the departure of the headquarters staff would likely trigger an exodus of talent from Dulles, but there was debate about whether the exits would diminish the region's status as a technology center or reinvigorate it, as former employees form or join other start-ups.
Former AOL executives in the past have helped create a local network of technology firms, signing on with companies in online music, Internet phone service, and other Web technologies, with varying degrees of success.
"I would anticipate the move will only accelerate the ongoing exodus of management talent in the company," said Adam Lehman, formerly an AOL senior vice president and now a Baltimore venture capitalist.
Falco would not rule out layoffs in the future. "In some places," he said, "we're going to be adding resources, and in other places, just because of the nature of the business, we'll be scaling back parts of the business."
A mainstay of the dot-com age, AOL, formerly known as America Online, used its high-flying stock to take over venerable Time Warner in 2001. But the marriage did not go smoothly, and an accounting scandal forced the company to pay $300 million as part of a settlement with the government.
The media conglomerate eventually dropped AOL from its corporate name, relegating the online unit to subsidiary status and leaving it in Dulles.
One source familiar with the thinking of AOL's senior management said there remains interest inside the media giant to eventually spin off the Internet operations into a free-standing company.
But another source familiar with Time Warner's management said the company is content with keeping AOL in-house to see if it can grow. Both spoke on the condition of anonymity because they were not authorized to speak on the corporation's behalf.
"We want to give this some time," said the source familiar with Time Warner. "The question is, what should we do with it? Should it be a springboard to do other things? Any decision is premature. We believe it has real potential."
Once the provider of Internet access to 30 million people over telephone lines, AOL in recent years abandoned its original fee-for-service model as subscriptions declined and Internet access was taken over by cable and telephone companies.
Falco said the push into advertising was part of the company's efforts to compete with Yahoo and Google, which figured out a way to sell advertising on the Web at a far lower cost than competitors.
The realignment comes at a time of rapid and massive change in the online advertising market, as new technology is diverting audiences into parts of the Web where banner ads are not easily placed and creating new opportunities for advertising.
Social networking sites, such as Facebook and MySpace, are keeping their members on those sites for hours at a time. Meanwhile, the number of people with access to the Internet via a cellphone is growing. And customized news feeds allow people to create their own unique online presence, complete with teasers to their blogs, online photo albums and customized video channels.
"What AOL is doing is making it easier for advertisers and agencies to buy ads and integrate them into their different components," said David Hallerman, senior analyst at eMarketer in New York. "Simplicity is something that advertisers and agencies really need."
AOL is not alone in beefing up its online advertising presence. Just last month, Microsoft completed its acquisition of online ad service company aQuantive in a $6 billion deal, and Google said earlier this year that it plans to acquire DoubleClick, the leading display ad company on the Web. That deal, valued at $3.1 billion, is awaiting regulatory approval.
In less than two years, AOL has acquired a District-based video ad company called Lightningcast, an online ad company called Advertising.com and mobile phone ad company Third Screen Media. Earlier this month, it purchased Tacoda, which attempts to match advertisements to consumer behavior.
Andy Monfried, co-founder of Lotame, an advertising company focused on citizen journalism and social networking sites, said AOL needs to bring its acquisitions together to show how the investments can help the company.
"AOL has made it clear that it wants to be close to media dollars, the heartbeat of the advertising industry," said Monfried, who worked for six years in sales at Advertising.com. "Can they execute and bring one company into the business? Can they execute to bring this all together?"
New York, he said, may be the place for them to do that.
On his blog, Ted Leonsis, vice chairman emeritus of AOL, said the move to New York completes the transformation of the company.
"AOL is truly a media company now by moving its headquarters to NYC," he wrote. "Now it can evangelize the company's lead in third party ad networks pivoted around Advertising.com and its set of recent acquisitions."
AOL also announced yesterday that it has forged an agreement with Hewlett-Packard to provide portal, toolbar and search software on HP desktops and notebook computers. AOL.com will be the default portal on the computers' browsers.
AOL's new headquarters will be at 770 Broadway. Employees are expected to move in by the spring.
Falco said AOL remains committed to the Dulles campus, nestled north of the airport, right off the Dulles Greenway. AOL also has major campuses in Bangalore, India, and Mountain View, Calif.
"We'll still have a very large presence in Dulles, which will still be a very important part of our access business. Our product development team will still be in Dulles."
Staff writer Howard Schneider and researcher Richard Drezen contributed to this report.