Citi Media: Armstrong: Focus Is On Improving Search, Local; Web Services Must Be Self-Supporting

AOL (NYSE: AOL) CEO Tim Armstrong arrived at the company nine months ago and found morale suffering badly, primarily because the company wasn’t “winning.” Now, that the company out from under Time Warner (NYSE: TWX) and is on its own, the company is currently going through massive layoffs and a major rebuilding, that Armstrong said will take at least a year to show tangible benefits. In a Q&A that kicked off the last day of the Citi Global Entertainment, Media & Telecommunications Conference in San Francisco, Armstrong repeated his past comments about developing its content systems and platforms, with a concentration on blogs and local, as well as planning for a display comeback.

On the topic of search, Armstrong noted that with AOL’s search deal with his former employer Google (NSDQ: GOOG) is set to end next December. He said he’s heard from a few prospective candidates who would like to take Google’s place and he could see entertaining arrangements with other entities, such as Microsoft’s Bing.

But he emphasized that Google has been a great partner and he didn’t say he was looking to move away from that relationship. However, he did say that the current deal doesn’t have wider benefits for AOL. “Future search deals will have to good for AOL overall, not just as a way to drive quick cash,” he said. “And cash is very important. Could we get the same economics we got before. We have a lot of people on our side who know how to do a search deal. So I think we can get good terms. There are some things we might trade off in next search deal, like reducing the number of search ads from outside parties and putting more content on our sites that we can sell display against.”

Armstrong also touched on the new look of AOL’s homepage and how it reflects its new ethos regarding the ads. For the past few months, Armstrong has been saying that AOL wants to put a greater emphasis on premium advertising. That vision has been put to work on the homepage, he said. “There used to be 17 ads on the homepage, now there’s only one. That helps advertisers (by reducing clutter) and makes for a better user experience.”

Moving on to local, Armstrong said that the hyperlocal community sites under Patch is central to that strategy. “Will we be successful in local? I think so. We have very different products that differentiates us from others in the space. In addition to Patch, which needs a lot of growth and a lot of work, but has a great future, we also have MapQuest, we have search. Plus, look at the trends of people shopping on their phones. I look at my wife and how she coordinates her whole life on her iPhone. If you look at everyone from moms to businesspeople — and sometimes, they’re the same person — the cell phone is central to their work and the lives. That’s a big opportunity for us.”

Asked if he sees sites like Facebook as a competitor, Armstrong sees them as more of a partner. “We rely on them for distributing our apps. So I don’t see them as something to be against. We see them as another partner, like we also see Yahoo (NSDQ: YHOO) as a possible partner. For us, Facebook is a big friend.”

One of the interesting exchanges was over the value of the access business and how it has supported the web services business. In response to his Citigroup questioner, who said that the web services business is “shockingly unprofitable,” Armstrong said he expects the business to break even this year. “We have one rule for the web services business: it won’t live off access cash; that business has to be self-supporting.”