Change Is Tough, but Necessary, AOL Chief Says

"If by content-creation, [you] mean we're going to go a Hollywood studio and ask traditional media people to begin to create for us special programming, we're definitely not in that business," Falco said.

Falco spoke Thursday in his New York office, a temporary space in the Time Warner building that shares the ninth floor with Time Warner's tax division and a print shop. By April, he said, AOL should be in its new headquarters on lower Broadway, in Greenwich Village, which he described as "a hot, cool place for young people to be." The shop will house about 400 employees initially, Falco said, and some will be moved from Dulles.

Falco is a three-decade veteran adman and operations executive. But this is his first time in the big chair, and he's still learning how to navigate the job's perks. He said he typically spends Monday through Thursday in Dulles and flies to New York on Thursday night on a company jet, which lands at the Teterboro Airport in New Jersey, across the river from Manhattan. But at least five times, Falco acknowledged, he diverted the jet to the White Plains, N.Y., airport, closer to his home. He stopped rerouting the jet because he felt bad inconveniencing the other passengers, he said.

He is trying to adjust not only to the speed of change in the industry he's learning -- faster than he anticipated -- but also to the blowback from disgruntled, laid-off employees -- nastier than he expected.

For an analogy to explain and justify the layoffs, which will account for 20 percent of AOL's workforce, Falco reached back to his old industry.

"It's as if I were to go to HBO tomorrow and say, 'You guys, you're not in the subscription business anymore, you're going to be in the advertising business,' " Falco said Thursday. "You almost couldn't run HBO with the same people."

Still, one of the dangers in laying off smart, motivated, creative computer-literates with access to the Internet is that they have plenty of ways to express their displeasure.

One Web site has posted T-shirt designs acidly touting the "AOL Annual Layoffs 2007," some of which show a bloody knife or feature Falco's picture and attribute fictional, and foul-mouthed, quotes to him. Others steal an image from "The Simpsons," showing two characters: Evil nuclear power plant owner Mr. Burns and his younger, sycophantic lackey, Smithers. This is meant to jab at Falco and his youthful chief operating officer, Ron Grant. Falco and Grant are so close, some within the company have taken to calling them "Rondy."

Falco hired Grant, 41, from Time Warner to run AOL's day-to-day operations. He and Falco engineered a plan to revamp AOL's search function that led to the company to missing its second-quarter earnings numbers by about $20 million. But it's a hit Falco said he knew he would take and that his supervisor -- Time Warner president Jeffrey L. Bewkes -- knew was coming.

Falco said AOL expected advertising revenue growth in the second quarter of about 20 or 21 percent. When the second-quarter earnings were released, it ended up being 16 percent. That four- or five-percentage point difference was $20 million, Falco said. "That was the 'miss,' which is not a gigantic miss."

Some analysts have written that they do not expect AOL's revenue to climb in 2008, and Time Warner chief executive Richard Parsons said the turnaround will take at least six more months.

"They're changing the business model, and it's not surprising to see revenues go down," said one former AOL executive who spoke on condition of anonymity because he may have future dealings with the company. "Less revenue means you need less people, but that reasoning hasn't been communicated well to people there," the executive said, adding that the mood at the Dulles campus is "raw."

After nearly a year at AOL, Falco knows he may never win over hard-core techies.

"I'm not from this industry, but I'm at least from the media," Falco said. "And I certainly understand advertising -- it's the same money we're all vying for here."