CEO Tim Armstrong, Arianna Huffington Reveal AOL’s Ambitious Hollywood Strategy

Issue 09 Cover AOL
Jeff Lipsky

AOL CEO Tim Armstrong is enlisting the likes of Heidi Klum and Arianna Huffington to turn the mega internet corporation into a Hollywood force.

FULL COVER STORY: Inside AOL's Hollywood Ambitions


On the new cover of The Hollywood Reporter magazine with Huffington and new AOL partner Heidi Klum, Armstrong says, “We have a plan and we're executing as quickly as almost any company in our space."

The following story appears in the upcoming issue of The Hollywood Reporter magazine on newsstands Thursday.

On the set of a photo shoot at a Los Angeles studio, AOL CEO Tim Armstrong settles into salesman mode, explaining how a strategy laser-focused on content will turn around his troubled Internet giant. He adjusts his sturdy 6-foot-4 frame and begins rattling off traffic figures, audience metrics and potential cost savings without so much as flinching.

He'd willingly go on, but Heidi Klum -- one of AOL's newest celebrity acquisitions -- has come bounding out of her dressing room in impossibly high YSL heels and is already critiquing his look as though he were a contestant on Project Runway. She persuades him to remove his suit jacket, unbutton his dress shirt and shed the powder-blue Hermes tie. "Come on, you can't be too stiff," she chirps in her endearing German accent. "It's Hollywood." Then she turns to the photographer shooting the pair with AOL's newest executive, Arianna Huffington, for the cover of this magazine, "Are we cute?" She puckers her lips. "Are we Charlie's Angels cute?"

No doubt, it's a new culture for Armstrong, who has spent the past decade-plus ensconced in a far more corporate world. But it's one the 40-year-old executive will need to get comfortable with as he continues his aggressive push for more partners like the supermodel/reality TV star. Hollywood now is an integral piece -- in fact, the most important piece - of his premium-content strategy to revive the much-maligned Web company he took the reins of two years ago.

During the past eight months, even before his $315 million acquisition of the Huffington Post was announced Super Bowl Sunday, he has brokered content deals with everyone from Klum, Gisele Bundchen and the Jonas Brothers to Mark Burnett, Ben Silverman and Michael Eisner's Vuguru. AOL signed to cross-promote Ellen DeGeneres' site and will soon roll out a late-night video block featuring highlights from the podcasts of Kevin Smith, Adam Carolla and Kevin Pollak. Now, The Hollywood Reporter can exclusively report that the company will add Queen Latifah to its roster. Beginning in the spring, she will produce and star in Web series about sports, entertainment and entrepreneurialism. Huffington, co-founder of the Huffington Post, will oversee this and the site's content.

To hear Armstrong tell it, these boldfaced names are the future of the Web. And like every studio chief in town, Armstrong is banking on stars. "The first phase of the Internet was about access, and I believe AOL was the biggest player in that phase. Then the next phase has really been about the platform, so you've seen Apple, Google and Facebook there," he says. "But the phase after this is going to be more of the Hollywood phase, where it's about content, creativity and really putting a human face on the Internet."

If this sounds like a story you've heard before, it's because it's very likely you have. The big sites like AOL have been trying to find a way to make money off of Hollywood for the better part of the past decade. You might recall the Lloyd Braun-Terry Semel era at Yahoo, when the Web behemoth was convinced the creative community was its ticket to heaps of ad revenue -- until it abruptly decided it wasn't and the company quickly latched on to the next strategy. Or perhaps when AOL gathered about 500 potential Madison Avenue buyers into Manhattan's opulent Time Warner Center to highlight its second installment of Burnett's interactive series Gold Rush, along with other ad-supported projects from DreamWorks Animation, Telepictures and Endemol. That was in 2007.

This time, though, the push is not only bolder -- with the help of advertising partners, AOL is ponying up between $1 million and $10 million-plus per project -- but more critical. In a crowded marketplace where content is increasingly a commodity and social networking sites a threat, partnering with household names is a way to differentiate a site and appeal to users and advertisers alike. Both are key as AOL's search business continues to lose share to juggernaut Google and engagement metrics pale in comparison with sites like Facebook. According to Compete data, users stayed on the latter for an average of 25 minutes in January, compared with a measly six minutes on AOL.

Worse, AOL is still dependent on its rapidly shrinking dial-up business, which accounted for 40% of its revenue last year. Despite Armstrong's stellar reputation and some commendable moves, his aggressive turnaround efforts have yet to bear fruit. In the last quarter of 2010, AOL's overall revenue plummeted another 26% to $596 million as advertising and subscription revenue fell 29% and 23%, respectively.

But even if AOL is, at times, a punch line, it is also a major source of capital, and that in itself makes it an attractive partner for the entertainment industry. Unlike most digital operations, AOL has cold, hard cash - as opposed to far-fetched dreams -- to offer. Armstrong proved as much in February when he shelled out the $315 million, $300 million of it in cash, to buy the Huffington Post.

Although some have questioned the wisdom of acquiring Huffington's news and aggregation site -- Wall Street pushed the stock down 4% the day following the early-February deal -- Armstrong at least succeeded in changing the conversation about his company: Suddenly, people are talking about AOL as a possible player again, one with a plan.

"I love the fact that Armstrong's vision is so huge," Huffington says. "I really think this time we're living through now is going to reward bold moves."

Now, with an eye to Hollywood and a long history in ad sales, Armstrong has tasked a team of 25 to work exclusively on building partnerships with the creative community and the brands looking to be associated with AOL. (Your average Joe might be able to rack up plenty of hits on YouTube, but Madison Avenue isn't exactly clamoring to be associated with him the way it is a Joe Jonas.) In charge is Erin Clift, AOL's senior vp brand experiences, another former Google executive, who lines her schedule with frequent trips to Los Angeles and at least 10 meetings a week with agents, producers and technology companies in the space. "We're very serious about this," she says from her Manhattan office. (Business development chief Jared Grusd and video programming chief Amber Lawson are similarly active in the courting process; Armstrong, too, is hands-on with the talent.)

Thus far, the deals have varied greatly, both in budget and structure (Klum will offer an entire site, Planet Heidi, with videos, blog entries and slide shows; Eisner's Vuguru will license at least six scripted series). Clift admits that this is all a work in progress as her team -- and the brands helping to finance its Hollywood productions -- gets a better sense for what users connect with online.

"Win, lose or draw, Tim will deserve a lot of credit for recognizing that this is the future," Eisner says of digital storytelling. "Is he too early? I don't know, but he's right. Right doesn't always win immediately, but right will win eventually."

So why would someone of Latifah's celebrity status bother with an industry -- and a company -- that's still emerging, particularly when she can connect directly with fans on such social media sites as Facebook and Twitter? Her answer is simple: AOL offers immediate scale (say what you will, it gets 15 million visitors to its homepage every day) and a major marketing tool for all things Latifah. She also says it allows a flexibility and level of creativity not always attainable through traditional production channels in film and TV.

"It's great having a company that's supportive of doing the same kinds of things and looking to the future, as opposed to trying to hold on to how things were in the past," she says after a long day on set in Atlanta, where she's shooting the Warner Bros. film Joyful Noise.

Although she'll produce these shows with the team at her production company Flavor Unit, the rapper, actress and longtime face of Cover Girl insists she'll have a regular role in at least the first three projects. "I'm kind of the Barbara Walters," she laughs. "I'll definitely float in and out." She is particularly excited about a sports-themed talk show for women that she has planned. In TV land, a show like that could take years to get off the ground; at AOL, it will be ready by summer.

Klum says she's on board for many of the same reasons, noting that AOL offers her the potential to reach a far bigger audience than she ever could on one of her cable shows. AOL's homepage alone draws more than three times the weekly audience for her Lifetime series Project Runway.

What's more, Klum's site is a mix of her ideas, tips and friends (stylists, interior designers and chefs) without the interference of network and studio bosses. "Sometimes television shows think too much about their ratings," she says. "I want to just do something that's right, that's me." Like Latifah, Klum will have her Runway production company, Full Picture, helping to feed the site with fresh content daily.

Of course, creative freedom is great, but so is money. And the money from AOL and other major sites is increasingly a draw, particularly as salaries from TV and film continue to shrink and outlets like Twitter offer little more than a middleman removed (sure, 5 million Twitter followers is great, but try cashing that in at a bank). According to several agents with knowledge of the deals, it's not out of the ordinary for marquee talent to walk away with high-six to low-seven figures, against revenue, for these types of digital partnerships. Five years ago, it was commonplace to be paid about $50,000, all-in, to write, produce and deliver a series of webisodes.

The adjustment, says former William Morris CEO Jim Wiatt -- who now serves as a strategic adviser to AOL -- comes from how the fees are paid: Unlike TV or film projects, where lump sums are doled out upfront, the additional zeroes here come only in success. "But there are enough people who are interested in exploring that world -- who see it as the future and as another way to get product made today," says Wiatt, who served in a similar role at YouTube about nine months ago.

UTA digital chief Brent Weinstein is thrilled to have the outlet for his clients. "In certain instances, particularly in the film world, there seem to be fewer writing jobs, for example, and there are certainly fewer buyers than there used to be, and I think that creates a need for people to have places to take their ideas," he says. "But even if the film industry looked exactly like it did 10 years ago, I still think that what these online media companies like AOL are doing really appeals to the entrepreneurial nature of professional artists."

From where AOL sits, they feel strongly that the potential upside justifies the money spent. What was once viewed simply as a marketing tool is now a moneymaking venture for the company. "This is not 'let's throw content against the wall and see what sticks' anymore," one insider says. "These are real P&Ls."

Among the reasons is AOL's ability to remove some of the guesswork from the process, a step up from TV's focus groups. With Planet Heidi, for instance, Clift's group took the idea to Klum only after AOL's internal data showed users had a hunger for more content and depth on motherhood and brands like Johnson & Johnson and Procter & Gamble expressed interest in being more involved in it. In this case, Klum's name was recommended by the company's algorithmically generated "quality score," which deemed her particularly influential in the areas of parenting, fashion and style.

"Brands would rather be in these premium spots where there's a certain amount of prestige," Sterling Market Intelligence analyst Greg Sterling says of the digital equivalent of product placement.

Proof: Cambio, an online hub for entertainment videos, discussions and news from Jonas Brothers, was profitable before it even launched. The site, which counted AT&T and JCPenney among its early partners, attracts 2.7 million unique viewers per month.

"It's not a novel approach, but it's the right approach," says a rival who declines to be named for competitive reasons. "They can't stop the bleeding on the dial-up business, so they're going after high-quality content with names attached in order to bring in the big branded-entertainment money."

To his credit, Armstrong -- the fifth AOL CEO of the past decade -- isn't sitting idle, waiting for a "sick" company to grow sicker. Since he left his position as a senior ad chief at Google, he has untangled AOL from its ill-fated merger with Time Warner, decluttered the site's homepage (cutting the number of ads from as many as 15 to one) and slashed 30% of AOL's staff. He has unloaded unattractive properties like social network dud Bebo and homed in on women as his target audience. According to AOL metrics, the site skews female, with more than a third of visitors between the advertiser-friendly ages of 25 and 44.

Armstrong also has been on an acquisition spree, cutting 13 deals - nine since the spinoff -- totaling about $600 million since joining the company. In September, he bought the tech blog TechCrunch (for about $25 million), video content syndication platform 5min Media (about $65 million) and social software startup Thing Labs.

In a memo leaked to in February, Armstrong seemed equally aggressive about the content mandate, calling for his staff to increase its output of stories from 33,000 to 55,000 and videos from 4% to 70% of all stories produced.

"The AOL Way," as the manifesto was titled, had many in the media claiming AOL was going the way of Demand Media, a "content farm" that traffics in algorithmically generated stories based on desire rather than need. (The master plan also instructed editors to make coverage decisions based on traffic and revenue potential as well as edit quality and turnaround time.)

Armstrong brushes off the criticism. "Our strategy is to focus on high-quality content at scale," he says. "The system that we've been building, which the press has taken to calling a content farm, is simply a platform." If Klum decides to make a video on jewelry-making on her site, the platform could research and present information on some 10,000 types of beads. "It's an add-on strategy," he says.

Armstrong admits the evolution might create redundancies that will result in departures. David Eun, whom Armstrong recruited from Google to be president of AOL Media and Studios a little more than a year ago, announced he was exiting less than three weeks after the Huffington Post acquisition. But Armstrong doesn't foresee wide-scale layoffs. "I would expect us to be a net importer of talent, and in cases where we have to change business models or change what we're doing to make AOL successful, there may be more future departures," he says.

In a similar bid to lure eyeballs and ad money, rivals MSN and Yahoo have also done their share of webisodes. Where AOL differs from its portal competition is its particular interest in stars. MSN has instead focused on partnerships with Gail Berman and Braun's BermanBraun on content sites like Wonderwall and original video series from outlets like Next New Networks. Yahoo, which garners nearly two-thirds more monthly users as AOL, has been busy growing its roster of Web shows from such production companies as Electus and Reveille.

Google, too, made headlines in February when New York Magazine's Vulture blog reported that YouTube was courting celebrities in its push toward professionally produced content. Once the domain of user-generated cat-on-a-skateboard videos, the site's strategy was to create about 20 celebrity-branded channels featuring a host of original three-minute shows. (Sources familiar with the company's plans say the strategy is not as celebrity-focused as the report suggested and that the reported $5 million budget was overstated.)

Clift dismisses the competition, arguing that AOL's advantage is its "maniacal focus" on content. "This is the only thing that this company does," she says, echoing her boss' content, content, content rallying cry.

Now, perhaps poignantly, the Huffington acquisition not only could inject some cachet into the tired Web brand but also give AOL its first definable identity in ages.

Critics in the media called the acquisition the equivalent of a Hail Mary pass. To them, Armstrong says, "Hail Marys are for people who don't have a plan; we have a plan ... and we're executing as quickly as almost any company in our space." Continuing with the football metaphor, he calls the HuffPo deal a "first down," arguing that the company is marching the ball down the field.

HuffPo -- or more specifically, HuffPo's model -- hasn't been immune to criticism, either. Since the deal was announced, many of its unpaid bloggers have come forward to blast its pay structure. A Facebook group titled "Hey Arianna, Can You Spare a Dime?" was launched as a destination for disgruntled writers to voice their frustration, while still other outlets likened Huffington to a new-media slave driver. (HuffPo does pay an editorial staff of nearly 150.)

Huffington, who will assume control over all AOL content, including Hollywood projects, once the deal is finalized, is frustrated by the attack. "I don't just find them wrong, I find them truly offensive because I feel that slave-driving and sweatshops are real problems in the world, and to make any comparisons like that is self-indulgent and childish," she says from her home in Los Angeles. "We're providing a platform for those who want to use it; nobody has to use it."

Fittingly, in the Huffington Post's six-year history, that platform has proved particularly appealing for a creative community looking to control its message. When Rob Lowe wanted to get out in front of a media storm that a family lawsuit would cause in spring 2008, he turned to her site to not only break the news on his terms but also present his side of the story. Two years earlier, Huffington's friend and agent Ari Emanuel used it to articulate his concerns about Mel Gibson's anti-Semitic rant, ultimately changing the conversation -- and Gibson's career prospects. More recently, George Clooney and Sean Penn have turned to Huffington's site to push their social causes. (Like the fuming bloggers on Facebook, none of them is paid.)

After reeling off an impressive list of past and present contributors to her site, including Larry David, Nora Ephron, Bill Maher and Alec Baldwin, she says, "Hollywood has always been part of Huffington Post's DNA." But that thought is interrupted when her phone rings. On the other end, the PR director for fashion house Ports 1961 - and yes, a HuffPo blogger - is checking to see if she had chosen a gown for Oscar night's festivities. On her agenda: the ultra-exclusive Vanity Fair party, where she was set to join her new boss in the company of dozens of new, potential partners.

Georg Szalai contributed to this report.