When Time Warner reports its second-quarter earnings tomorrow morning, before the markets open, most Wall Street analysts are not expecting much from the media giant, as it continues to slog toward a rejiggering of itself.

Time Warner (TWX)–which owns assets like the Warner Bros. movie studio, the AOL online unit, the HBO and Turner cable television networks and Time Inc. magazines–is expected to earn 37 cents per share, compared to 72 cents a year ago, according to a poll of analysts from Thomson Reuters (TRIN).

Revenue is expected to be $6.97 billion, down from $11.56 billion in the same quarter last year. This drop is mostly due to the March spinoff of its cable unit, Time Warner Cable.

With movies like “The Hangover” and the sixth in the series, “Harry Potter and the Half-Blood Prince,” doing well, there is some strength at Time Warner.

But the advertising market has been weak all over, which hits the company hard.

That’s why both AOL and the magazines are expected to keep up their drag on Time Warner’s financial prospects–at least until the November spinoff of the online unit.

Until then, most expect another miserable quarter from AOL advertising revenue. Sources noted that any turnaround won’t show till end of year at the earliest, due to the weak economy and a retooling of the company and its sales force.

That restructuring is not over, most agree, with expectations of more layoffs of some of its 7,000 employees coming. With the 100-day overview by new CEO Tim Armstrong now over, sources said, the staff size is likely to be adjusted accordingly.

Most also expect to see continued weakness at the long-suffering Time Inc. magazine division.

People outside the company think that Time Warner CEO Jeff Bewkes will want to sell or spin off Time Inc. once AOL is done.

And people inside the company talk about the fact that Time has some 125 titles, although most of the revenue and profit only come from a few titles, such as People, Sports Illustrated and Time.

According to sources at the magazine division, talk of a new round of layoffs has also been also circulating there of late.

[The t-shirt image courtesy of Zazzle.]

Here’s Time Warner CEO Jeff Bewkes’s Memo on the AOL spinoff, which was approved by the media giant’s board last night and announced this morning.

BoomTown reported a lot of the deep details of the new structure of the online unit, which sweeps aside the previous one and includes a new venture unit.

Here’s the memo:

May 28, 2009

To: Time Warner Colleagues

From: Jeff Bewkes

Subject: Time Warner Announces Plan to Separate AOL

As you know, we’ve been working with AOL’s new management to move that company into the next phase of its evolution. To that end, we’ve been discussing the optimal ownership structure to enable AOL to fully realize its potential as a global Web services company. This morning, we announced that our Board of Directors has authorized management to proceed with plans for the complete legal and structural separation of AOL from Time Warner. Following the proposed transaction, which we aim to complete around the end of the year, AOL would be an independent, publicly traded company.

We believe that a separation will place both Time Warner and AOL in the best position to succeed, with greater operational and strategic flexibility. As an independent company, AOL should be a stronger competitor that is better able to deliver new and innovative products and services. At the same time, the separation will be another important step in the process we began last year of refocusing Time Warner to an even greater degree on our core content businesses.

For additional details about the proposed transaction, please click here to read the press release. I know you will have questions about this separation and how it may affect you and our company. We will provide more information as it becomes available over the coming months.

In the meantime, I’d like to thank the management and employees of AOL for the many contributions they have made, and continue to make, to our company. I’d also like to thank all Time Warner employees for your hard work and dedication. We’re making great progress toward our goals of building Time Warner into the world’s leading content company and improving our stockholders’ returns. With your continued support, I’m confident we have a bright future.

Incredibly, this is the seventh year of the D: All Things Digital conference.

We feel very lucky to get here, especially in the midst of what our own site’s Digital Daily scribe, John Paczkowski, has so perfectly dubbed the “econalypse.”

Ironically, Walt Mossberg and I planned to launch the very first conference in the middle of the last major downturn for tech, in 2001. But, in the carnage of the Web 1.0 meltdown, we actually held off for two years, with our first D gathering taking place in 2003.

It’s been a real winning streak since then for D, due in large part to our great speakers–such as Microsoft (MSFT) icon Bill Gates and Apple (AAPL) legend Steve Jobs.

Both have been onstage many times over the years, including a historic interview the pair of tech titans did together in 2007 at D5.

Other amazing speakers have included: Howard Stringer of Sony (SNE), Barry Diller of InterActiveCorp (IACI), legendary director George Lucas, Time Warner (TWX) CEO Jeff Bewkes, Jeff Bezos of Amazon (AMZN), former eBay (EBAY) CEO Meg Whitman, News Corp. (NWS) head Rupert Murdoch, Microsoft head Steve Ballmer, Walt Disney (DIS) honcho Bob Iger, Bobby Kotick of Activision Blizzard (ATVI), CBS (CBS) CEO Les Moonves, Democratic and Republican pols like former Vice President Al Gore and Sen. John McCain, all the leadership of Google (GOOG) and many, many more.

We have had a lot of great moments onstage with all these tech and media players over the years, to be sure, with interviews ranging from the funny to the sublime to the truly disastrous.

But, like the digital industry and the innovation our conference focuses on, we also like to lean forward to try to figure out what the Next Big Thing is around the corner, whether it comes from Silicon Valley or not.

That’s why we’re kicking off our conference on May 26 with two of the founders of Twitter–Biz Stone and Evan Williams–who are riding high on tech’s latest hot thing, which might turn out to be either a rocket ship or a shooting star.

They’ll be followed up over the next two days by a plethora of interesting players, from the leaders of several major mobile companies to content execs hit hard by fast-moving digital forces to a new Internet leader like Yahoo (YHOO) CEO Carol Bartz, who is trying to turn around one of the Web’s great icons from its more recent lackluster path.

And, as we always do, we will be featuring a spate of demos too, trying to see if we can unearth that next next thing.

In the past, the D stage has seen the debut of start-up products like Sling Media’s Slingbox, Aliph’s Jawbone and Pure Digital’s Flip, all of which have gone onto glory. And also some, like Palm’s Foleo, which did not.

While not everyone can attend D, our crack staff is committed to bringing all the action from this year’s conference to readers of the All Things Digital site via up-to-the-minute blogs, photos, videos, tweets, digs and more. We’ll also, as soon as we can, post the videos of each of the onstage sessions, in their entirety.

Until it all kicks off, here is the list of speakers, below, in alphabetical order, who will be appearing at 2009’s D7 conference:

Irving Azoff | CEO of Ticketmaster Entertainment (TKTM)

Mitchell Baker | Chairman of Mozilla

Steve Ballmer | CEO of Microsoft

Carol Bartz | CEO of Yahoo

Mark Cuban | Chairman of HDNet and Owner of the Dallas Mavericks, Landmark Theaters and Magnolia Pictures

Eve Ensler | Playwright and Founder of V-Day

Arianna Huffington | Editor-in-Chief of the Huffington Post

Olli-Pekka Kallasvuo | CEO of Nokia (NOK)

Mike Lazaridis | Co-CEO of Research In Motion (RIMM)

John Lilly | CEO of Mozilla

John Malone | Chairman of Liberty Media Corporation (LCAPA)

Roger McNamee | Partner, Elevation Partners

Jon Miller | Chief Digital Officer of News Corp.

Jon Rubinstein | Executive Chairman, Palm (PALM)

Randall Stephenson | CEO of AT&T (T)

Biz Stone | Co-founder of Twitter

Owen Van Natta | CEO of MySpace

Katharine Weymouth | Publisher of the Washington Post (WPO)

Evan Williams | Co-founder and CEO of Twitter

Jeff Zucker | CEO of NBC Universal (GE)

Former Google (GOOG) exec Tim Armstrong officially started his job as new AOL chairman and CEO today and sent out a hello-there memo to the troops.

According to Armstrong, he is poised to “bring back the magic of AOL.”

BoomTown loves magic tricks and certainly hopes he can pull a rabbit out of the hat at the service, which was once the dominant player on the Web.

Armstrong is promising to look closely at AOL over the next 100 days, which “will end in Dulles with an All-Hands meeting in mid-July.” (Dulles is the Virginia-based AOL outpost that was once its world-wide HQ–it is now based in New York.)

There is homework too, AOLers!

But let’s hope it is not like the 100-day exam of Yahoo (YHOO) that did not work out so well for co-founder and former CEO Jerry Yang.

One sure sign of the seriousness of turning AOL around: While he has been getting ready to begin, AOL owner Time Warner (TWX) has been getting ready for Armstrong by putting in place conditions to allow AOL to spin out, seeking to amend debt agreements that restrict it from unloading the struggling business.

Here’s Armstrong’s entire memo:

AOLers -

Our work together starts today and we’re going to bring back the magic of AOL to our consumers and our partners.

As the world continues to move toward a digital information platform, AOL sits in a unique and venerable position. We’re a global digital brand and, thanks to your hard work, more than 275 million people across the globe touch AOL and our growing sub-brands every month. Billions of consumers and millions of businesses are making the digital migration, and we have a tremendous opportunity to help improve the experiences of all the people and companies making the transition.

We’ll make the decisions and the investments that are required to deliver exceptional value to our consumers. Consumers vote with their clicks and the time they spend on our sites, and we need to make world-class products and services that get votes based on a superior consumer experience. AOL’s partners and advertisers expect no less than our consumers, and we need to hold ourselves to delivering industry-best business solutions.

Over the next 100 days, I’ll be running a process to hear from all of you and many of the important partners connected to AOL. We’ll sit together in our offices around the world and have open forums about what we’re building for the future and what we’re accomplishing today.

The culmination of the 100-day process will end in Dulles with an All-Hands meeting in mid-July. At that meeting, we’ll review the feedback we’ve received–both internal and external. We’ll also discuss our strategic direction for the coming years, and highlight areas that will bring AOL and AOL properties into the next decade of digital leadership. Most importantly, we will set a course and focus all of our resources to make that course a success.

The road to Dulles in July starts this week with meetings in New York, Dulles and a Town Hall meeting with the team in Baltimore, and I plan to visit all of our global offices in my first 100 days. It is important for you to think about how AOL’s mission should be captured–how we can deliver exceptional value for consumers and partners, how we can encourage innovation, and how we can continue to make AOL an even better place to work. If you have thoughts before we meet, you can post them here and I will read them as we travel to all the offices.

Joining you today is a privilege and an honor. Over the past few weeks, I’ve had many opportunities to talk to current AOLers, AOL alumni and our partners. Each of them asked how they could help AOL revive the spirit we talked about in the tent in Dulles a couple of weeks ago–a spirit of dreaming big and delighting consumers every time they touch our brands. Jeff Bewkes and the leadership across Time Warner are putting their full support behind making AOL as successful as it can be. Now it is up to us to deliver on AOL’s full potential.

Thanks for having me and let’s set our sights high and our execution even higher. Go AOL.

- TA

BoomTown has confirmed a report by Nikki Finke of Deadline Hollywood Daily that former AOL head Jon Miller is set to take over as digital head at News Corp., replacing Peter Levinsohn.

The move was also mentioned in a blog post by Miller’s partner in an investment company, Ross Levinsohn, who once held a smaller version of the job Miller is taking.

But Miller has not actually signed up for the job officially, since he is still under a noncompete agreement with Time Warner from his AOL stint. It runs out in three days, in fact.

As some might recall, Miller was barred from taking a board seat at Yahoo last year by Time Warner CEO Jeff Bewkes.

But sources said News Corp. is likely to announce Miller as head by Monday or Tuesday at the latest.

Once he does sign, which seems likely, Miller will become News Corp.’s chief digital officer, reporting directly to the media giant’s head, Rupert Murdoch. Based in New York, he will also be chairman and CEO of the newly created News Digital Media group.

Sources noted that this is a a different and larger platform for Miller, bigger than just the Fox Interactive Media job that Levinsohn held. It will go across all properties held by News Corp. across the globe.

“The idea is to mainstream the digital initiatives, which have been all over the company,” said one source close to the situation.

Levinsohn will move to another job within News Corp. (NWS) at the film and television studios, to coordinate delivery of its assets on mobile and digital platforms, sources said. It will be his task to create sustainable business models in this fast-moving arena.

News Corp. has, in fact, been searching for a new digital head for the past several months, talking to a number of well-known Internet execs, including Joost head Mike Volpi, former AOL exec Jim Bankoff and former Facebook exec Owen Van Natta.

The decision to rejigger News Corp.’s digital assets came after the announcement that President and COO Peter Chernin was leaving his job and has largely been pushed by Murdoch.

Previously, Chernin had been in charge of digital efforts at News Corp.

The search for the position was, in fact, conducted by well-known head tech and media headhunter Jim Citrin of Spencer Stuart.

Ironically, Miller is still essentially taking a job once held by his current partner, Ross Levinsohn, at the investment fund, Velocity Interactive Group. As I noted above, Levinsohn confirmed the Miller offer from News Corp. in a blog post called “Thunderclap.”

The move is a fascinating one, and one of many in the digital arena of late among its top execs. Former Google (GOOG) exec Tim Armstrong recently took over as CEO of the Time Warner (TWX) online unit AOL, for example.

Also, even though the job will cover all the the many News Corp. Web properties, even more compelling will be how Miller will deal with its largest and most prominent asset: social-networking giant MySpace.

More to the point, it will be riveting to see how he will handle managing MySpace co-founder and CEO Chris DeWolfe.

Both previous FIM heads, Ross Levinsohn and Peter Levinsohn, many sources said, had to deal with DeWolfe’s own sphere of influence within News Corp., especially his close ties to Murdoch. Both FIM and MySpace are located in Beverly Hills, Calif.

Relations between DeWolfe and both those execs could be described, at best, as tense.

But Miller, who is a much bigger Internet player in his own right, with a more powerful charge from Murdoch, certainly is likely to shift that balance of power.

More to come…

(News Corp. owns Dow Jones, which owns this Web site.)

As soon as he got his new job last week, new AOL Chairman and CEO Tim Armstrong sent out a rather hopeful email to the troops–his first communication as the latest leader of the ragtag online service.

“I’m really looking forward to seeing you and would love to hear your thoughts and suggestions,” wrote the former Google (GOOG) exec Friday (who alarmingly kind of resembles this Elvis image), “on how to make AOL and its sister properties the most powerful brands on the Internet.”

Well, one can hope!

To goose that dream, although he still does not officially start in the job until April 7, Armstrong is also addressing all the troops tomorrow at 11 am EST and has chosen to do so from, of all places, AOL’s old center of power in Dulles, Virginia.

AOL staffers I spoke to also hope most of all that Armstrong will quickly and transparently lay out plans for a spin-out of the Time Warner (TWX) online unit from the media conglomerate, where it has languished for years.

“Armstrong would not have taken the job if the plans for a spin out of AOL were not in place and it’s in everyone’s interests to signal that it’s a go right away,” said one source close to the situation. “The only catch is the poor economy, but even that should not prevent Time Warner from doing what’s right to finally fix AOL.”

And sources said Armstrong could further up the ante tomorrow and help raise the layoff-weary morale by having some former AOL execs from its glory days as the top online player in person at the event.

Several sources said one exec most likely to make an appearance is Ted Leonsis (pictured here), one of AOL’s most colorful top early execs and a longtime inspirational figure within its ranks.

Unlike most AOL execs from those days, many of whom were eventually run out on a rail, Leonsis also stayed on through its disastrous merger with Time Warner and beyond.

But, like all of the Dulles complex–which was once the bustling worldwide HQ for AOL–Leonsis finally left the company, after a falling out with the management regime that Armstrong just hipchecked out of power. He is now AOL’s vice chairman emeritus.

Both CEO Randy Falco and President Ron Grant moved AOL’s locus largely to New York, and minimized the staff and influence at Dulles, where most of AOL’s products have been made since its origins in the early 1990s.

“It’s a smart move to go to [the Dulles staff] directly first…the last regime pretty much shut them out…and that created bitterness, when we need to be unified,” wrote one AOL insider to me in an email.

(Sidenote: As the AOL beat reporter at the Washington Post back then, I actually went with then-PR head Jean Case to look over what became the Dulles facility, to see if it would be a good place to expand to; previously, AOL was located in nearby Vienna, behind a car dealership.)

A Leonsis visit at AOL will be like old home week, although some are hoping too that former AOL CEO Steve Case could also make an appearance. He and Leonsis still make online investments together.

But that might still be deeply controversial within Time Warner, where Case and also former Time Warner CEO Jerry Levin are widely blamed for situation that the company found itself in when the Web 1.0 bubble burst and AOL’s once vaunted valuation collapsed.

Although Case and Time Warner CEO Jeff Bewkes have since moved on, bygones have not been bygones within Time Warner.

And, while it is often denied by top execs, AOL has suffered because of ill-hidden grudges, which have partly prevented it from being revived, even as other Internet giants have been born in the interim.

Ironically, many of the current crop of shooting stars owe a lot to the pioneering and innovative AOL products, including: its AIM and ICQ instant messaging services, which echo an early version of Twitter; the “Buddy List,” which was all about friending; and its deep social networking roots, with chat rooms and profiles that were the Facebook of its day.

The question for Armstrong is: Can AOL go home again?

BoomTown has a feeling that the very friendly new AOL CEO and Chairman, Tim Armstrong, is not going to waste his time chasing down and threatening to drop-kick leakers into outerspace.

At least I hope he has better things to do! Like, you know, turning around the troubled Time Warner (TWX) online unit.

So here is his first memo to AOL staffers, leaked to me. (Don’t go all Bartz on me, Tim, because it won’t work anyway!)

Last week, in a surprise move, the former Google (GOOG) advertising honcho was picked to replace ousted CEO Randy Falco, as well as President and COO Ron Grant, by Time Warner CEO Jeff Bewkes.

(Here’s a link to an interview I did with Armstrong last Thursday about the new job.)

Armstrong did not waste his time taking over, although he does not start until April 7, penning a short-but-sweet email to AOL employees world-wide.

Here it is, in its entirety:

From: Tim Armstrong
To: US Employees; Intl Employees
Sent: Friday, March 13, 2009 9:24:54 AM
Subject: Hello AOLers

Hello AOLers -

I’m really looking forward to seeing you and would love to hear your thoughts and suggestions on how to make AOL and its sister properties the most powerful brands on the Internet.

My experience online started with AOL and I’ve followed the progress of the company for many years. From the early days of AIM and ICQ to the modern technology of Platform-A, AOLers are responsible for some of the most important innovations on the Internet. Although others might see challenges at AOL, I see opportunity and people who are passionate about making great products and services for consumers. My thanks to Randy and Ron for the work they’ve done to position AOL for the future.

I hope to meet as many of you as possible in Dulles and New York sometime next week, and I look forward with great enthusiasm to starting at AOL in early April. Go AOL.

- TA

For a tall man, Tim Armstrong has been on an awful lot of online companies’ short lists.

For a big Web exec job, that is. Indeed, whenever one opens up in the Internet space, the 6-foot 3-inch Google ad sales exec always pops up on it as a possible candidate to lead a variety of digital companies and start-ups.

Finally today–after longtime speculation that Armstrong had long wanted and would eventually leave his post at Google (GOOG) in order to try his hand at being top dog–he took over as chairman and CEO of the once-mighty, but now-not-so-much, AOL.

Armstrong, 38, will start at AOL on April 7.

“For me, it is a great opportunity to go to what I consider a top-five Internet brand,” said Armstrong, in an interview with BoomTown this afternoon, with a whole lot of the diplomacy and nice-guyness he is well known for at Google and in the online advertising industry. “I am looking forward to taking what I have learned at Google and seeing what I can bring to really help AOL.”

Noting that for all its decline–pointed out by me–AOL was still one of the few “global Internet brands,” Armstrong said he thought there was still a lot of juice in the consumer appeal of AOL.

So much so, he added, that AOL owner Time Warner (TWX) has given him a lot of options for its future, from keeping it inside the larger media conglomerate (unlikely) to partnering with another company (less unlikely) to spinning it out (likely!).

“One of the things we discussed was making sure we were able to have the best outcome for AOL,” said Armstrong. “That could take the form of a lot of different paths.”

(Translation: As soon as the economy brightens, I am going to become a public company CEO, just like my soon-to-be-ex-boss Eric Schmidt!)

The move to put Armstrong in at AOL was sudden and swift, and also more than a little cutthroat on the part of his new employer, which bounced current Chairman and CEO Randy Falco and President and COO Ron Grant without a lot of warning to them or any top exec at AOL.

While there has been much talk about when Time Warner would become weary of the pair’s management of AOL–which has been rocky (most especially their overpaying for the Bebo social-networking site, which others at Time Warner never got over)–their defenestration and Armstrong’s installation happened rather quickly.

And, indeed, Armstrong confirmed that the talks to take over at AOL had only started a few weeks ago, increasing in “intensity over the last week.”

So intense, for example, that Grant only found out he was being replaced this afternoon after a personal visit from Time Warner CEO Jeff Bewkes, who made a rare appearance at AOL’s downtown Manhattan HQ to deliver the bad news.

(One AOLer’s funny, but entirely imaginary, vision: Bewkes signed up Armstrong, whose Google office is right nearby AOL in New York, and then hightailed it over to AOL to drop the hammer before the ink was dry on the contract.)

Via a coup or not, nabbing Armstrong is indeed a coup–at least from a shiny resume point of view–for Bewkes, who has been struggling with what to do with AOL for a while.

While he often affably jokes about its many problems–from declining ad sales to management turmoil to, it must be said, increasing irrelevance–Bewkes has been trying to sell off AOL or turn the asset into something more valuable for far too long.

Bewkes knows Armstrong well, as Google is a major partner of AOL in search advertising, and Google also owns five percent of AOL, in a deal in which Armstrong was involved (and whose value the search giant recently marked down).

Armstrong said he was also close to Time Warner General Counsel Paul Cappuccio.

“It was a natural fit with AOL, since I know the company so well,” Armstrong said, adding he would spend his first weeks getting to know AOL’s employees and its products better, before making more concrete strategic decisions or changing any course setting of Falco’s.

Under Falco’s plan, AOL was focusing on a three-pronged strategy: social networking and communications (People Networks), content (MediaGlow) and advertising (Platform-A).

“In general, I do want to spend time with the staff,” he said. “Some of the stuff I have seen so far has actually paid off…and a lot of the new products show a lot of passion.”

Whether he can turn passion into blockbuster products is another story, and some are worried that Armstrong’s experience is too heavily weighted in ad sales rather than in development of killer services, which is what AOL might need to recover.

But Armstrong said he had a lot of other operational duties at that search giant, noting that “Google is a very complex business.”

And both current and former AOLers hope his ad experience will allow AOL to return to its strong premium advertising roots that were less focused on of late. In fact, Falco recently hired former Yahoo (YHOO) sales head Greg Coleman to do just that.

And Armstrong has a lot of support from unusual sectors too. Wrote former AOL head Jon Miller, who was, ironically, forced out by Bewkes in favor of Falco and Grant, to me in an unsolicited email: “Count me amongst the Armstrong fan club.”

And, many staff at AOL I spoke to today–whose morale has been buffeted by layoffs and ongoing bad news–seem genuinely thrilled to score such a prominent exec.

“I am so thrilled. We couldn’t change the DNA with Rondy on top,” said one exec, referring to the derisive nickname that Falco and Grant had within AOL, which combined their two first names. “I feel really positive.”

So does Armstrong. “I am really looking forward to running AOL,” he said.

And personally, as a longtime and clearly obsessive watcher of AOL, I am looking forward to seeing him try.

Let’s just say the firing of AOL CEO Randy Falco and President Ron Grant was not exactly expected–even if everyone thought it should happen–within the high ranks of the troubled online unit, until Time Warner (TWX) CEO Jeff Bewkes dropped the guillotine this afternoon in Manhattan.

And drop it he did, quickly lopping off the pair of executives Bewkes had installed himself. He replaced them with Tim Armstrong, Google’s head of advertising sales, a man with a much brighter resume, for what is likely to be an attempt to spin out AOL now that merger options are moribund.

“It’s a shock to everyone how sudden it was,” said one exec. “Everyone talked about when Bewkes was going to run out of patience with Randy and Ron all the time, but no one knew it was coming now, since it had taken so long.”

Grant, for example, only found out about the situation when Bewkes told him in person earlier today at AOL’s offices in lower Manhattan, said several sources. Bewkes has hardly ever been there–he has a stunning office at the Time Warner Center in midtown–although Armstrong’s office at Google is nearby.

Falco might have learned about the situation earlier, but several sources said no other top exec at AOL did until about 30 minutes ago.

The whole coup came, said several sources, from corporate, which swooped and made the moves swiftly, very quickly after signing the deal with Armstrong.

(Here is an interview I did this afternoon with Armstrong after the appointment was announced.)

AOL PR did not seem to be aware of the move until this afternoon, and neither did its three top division heads: People Networks head Joanna Shields, MediaGlow President Bill Wilson or newly hired Platform-A ad leader Greg Coleman.

Yesterday, quite by coincidence, BoomTown wrote about the continued turmoil within AOL and the unhappiness with Falco, which was long-running:

“That’s caused a lot of people inside AOL and also a wider circle at Time Warner to increasingly point the finger of blame at AOL CEO Randy Falco, wondering if and when he will suffer too.

“‘Why Randy Falco gets to keep his job is a mystery to a lot of people,’ said one top exec at another division.”

Well, it is a mystery no longer, apparently, with Bewkes putting the high-profile Armstrong in place as AOL’s CEO and chairman, although he has been casting about for new leadership for a while, according to many sources, such as former Yahoo COO Dan Rosensweig.

AOL is in the midst of laying off 10 percent of its staff of 7,000, although many feel deeper cuts are needed, especially since Bewkes has been unable to complete a deal to sell it after a lot of trying.

Interest by Yahoo (YHOO) in merging with AOL, for example, has cooled and there seem to be no true suitors on the horizon. A spinoff of the division seems to be the most likely option.

Whether that includes a strategy reset for AOL or not is unclear.

Under Falco and Grant–who were derisively given the nickname Smithers and Burns from “The Simpsons,” and also “Rondy” by some inside the division who did not like them–AOL paid $850 million for the Bebo social-networking site last year, an overpriced move that has grated on many throughout Time Warner.

Under their plan, AOL was focusing on a three-pronged strategy: social networking and communications (People Networks), content (MediaGlow) and advertising (Platform-A).

But new Platform-A head (and former Yahoo sales exec) Coleman–whose business has to drive revenue growth–cannot perform miracles in such a weak environment no matter what cool new products and offerings either People Networks head Shields or MediaGlow president Wilson create.

Armstrong certainly knows sales, as head of sales efforts at Google (GOOG), although he has never operated a business as multi-faceted as AOL, which–despite its troubles–remains huge.

More to come soon…

Earlier today, Silicon Alley Insider reported that layoffs at AOL, which had been announced in January, were finally taking place.

Actually, said an AOL insider, about 10 percent of the layoffs, or 70 people, have been let go since the announcement. The pace just got ratcheted up today, adding another 300 to the pyre at the troubled Time Warner (TWX) online division.

But, said several sources, the slashing of staff might go well beyond what has been announced, as AOL continues to drill down on its three-pronged strategy: social networking and communications (People Networks), content (MediaGlow) and advertising (Platform-A).

That’s no surprise since AOL’s options have landed, to say the least, in that dreaded rock-and-hard place.

The interest by Yahoo (YHOO) in merging with AOL, for example, has waxed and waned–it’s waned right now, sources said, though not completely–and there seem to be no true suitors on the horizon.

And new Platform-A head (and former Yahoo sales exec) Greg Coleman–whose business has to drive revenue growth–cannot perform miracles in such a weak environment, no matter what cool new products and offerings either People Networks head Joanna Shields or MediaGlow President Bill Wilson create.

Thus, with the ever-weakening economy, there is still fat to be cut out, especially since Time Warner CEO Jeff Bewkes either has to sell AOL off or make it work a whole lot better.

And working better likely means more cuts–and a whole lot more of them.

That’s caused a lot of people inside AOL and also a wider circle at Time Warner to increasingly point the finger of blame at AOL CEO Randy Falco, wondering if and when he will suffer too.

“Why Randy Falco gets to keep his job is a mystery to a lot of people,” said one top exec at another division.

While one might look at, say, the media giant’s magazine division and ask the same of its head, Ann Moore, the more obvious answer is that times are tough all over and not just at Time Warner.

Said an AOL insider who does not like Falco’s leadership, but was sympathetic: “He probably should have pushed to sell it off more when times were better, but that was being run by corporate, so now he just has to deal with a weak economy and an online property whose value has been declining for a long time.”

In any case, for now, there’s no joy in Mudville. When the domestic layoffs are done by the end of this month, a source said, the company will turn to international firings (it’s harder to dump folks in Europe, apparently).

But, as another baseball maxim goes: At least when it comes to cuts at AOL, it’s never over until it’s over.

The game of executive musical chairs among Web companies keeps on going, with sources telling BoomTown that AOL ad head Lynda Clarizio will be departing the online service and replaced by former high-ranking Yahoo ad exec Greg Coleman (pictured here).

Last week, this column first reported on former Yahoo media head Scott Moore taking a similar content job at Microsoft (MSFT), which had been vacated by Jeff Dossett, who took Moore’s job at Yahoo.

The less confusing move at AOL, with Coleman taking over for Clarizio and which has been in the works for only a week, could be announced as early as today, although I have been hearing rumors of such a development since late last week.

Clarizio has been head of Platform-A, the overall name for AOL’s advertising business, which includes a lot of various online ad companies AOL has bought in recent years.

She had been running AOL’s Advertising.com in Baltimore before being tapped to integrate them better over the last year, after a series of ad execs shuffled in and out of AOL.

But, said several sources, as a former AOL lawyer and dealmaker, Clarizio (pictured here) is not regarded by top execs the kind of nitty-gritty sales exec that AOL needs now, as it seeks to revive its fortunes.

AOL’s ad business has lagged badly of late, with owner Time Warner (TWX) pre-announcing that the online service’s results would be particularly weak this quarter. Time Warner reports quarterly earnings tomorrow.

Since a much-chewed-over possible merger with Yahoo (YHOO) has been put on ice, with the recent arrival of new CEO Carol Bartz, Time Warner and AOL execs have decided to focus on strengthening the online service and making much needed changes.

AOL recently announced a 10 percent layoff of its staff of 7,000, part of the rightsizing that has been going on.

And its valuation was also recently written down by Google (GOOG), to $5.5 billion from $20 billion several years ago.

AOL had already been in the midst of renovating its communications and social-networking assets under a new division called People Networks, which is run by former Bebo head Joanna Shields.

Its content arm has also gotten a different blog-centered direction and name–MediaGlow–under Bill Wilson.

Now, it’s apparently time for the ad leg of AOL’s three-pronged new strategy its future business is resting on to be fixed.

The hiring of Coleman came suddenly, said several sources. He had been considering a top job at another well-known online company and also was planning to move to a start-up he has been running to the Silicon Valley area.

He was hired by AOL CEO Randy Falco, whom Coleman has known for a long time, only last week, after Falco heard that Coleman was considering other positions.

Sources at Yahoo said the hiring had to be cleared by the company and Bartz, at Time Warner CEO Jeff Bewkes’s request, due to competitive issues.

Coleman is indeed an experienced online ad exec, who was at Yahoo for seven years, responsible for all advertising revenues worldwide. He came to Yahoo from Reader’s Digest.

But Coleman ran into Yahoo’s management buzzsaw after trouble hit the company in 2007. He was one of the first in a long line of execs to leave the troubled company, departing in one of its many controversial reorganizations.

But Yahoo’s ad business did grow strongly under him and former Yahoo ad exec Wenda Millard. She was also pushed out of Yahoo and now is Co-CEO of Martha Stewart Living Omnimedia.

Since then, Coleman has been running a Los Angeles-based start-up called NetSeer, which focuses on ad targeting.

Given his media background, Coleman is likely to be key to expanding premium branded advertising display sales across AOL’s advertising and programming networks.

He will move to New York and report to AOL President and COO Ron Grant, said sources, although Platform-A has key offices in Baltimore and San Francisco too.

In Yahoo’s fourth-quarter earnings conference call earlier this week, new Yahoo CEO Carol Bartz went out of her way to ho-hum all over the possibility of a search deal with Microsoft.

She even went as far as to not even mention its name when she referred to the laggard third player in market share.

And Bartz also tried to make it seem as if a recent meeting between Microsoft CEO Steve Ballmer and Yahoo Chairman Roy Bostock–as well as Time Warner (TWX) CEO Jeff Bewkes, who presides over the AOL online service–was fiction. (It was not.)

Of course, it was all cooked up and well-rehearsed by Bartz, who knows how to play the expectations game as well as anyone else, especially as she endeavors to come up to speed on the various prospects for Yahoo going forward.

One person who has been close to the situation said it best: “Anyone would have said the same regardless of their true position at this point.”

Indeed.

Of course, BoomTown’s favorite–and obviously well thought out–line was in answer to an analyst’s question on shareholder value. No surprise: Bartz insisted Yahoo as a whole was, in fact, an unappreciated pearl before swine.

Actually, she used another barnyard metaphor, in the grand tradition of former CEO Jerry Yang’s “sacred cow” debacle.

“This is not a company that needs to be pulled apart and left for the chickens,” said Bartz, using a phrase she said was from her Wisconsin upbringing.

My guess is that the savvy and slick Bartz left that farm behind a long, long time ago and was again using the folksy straight talk in some serious gamesmanship with Microsoft (MSFT) and anyone else.

And perhaps Yahoo (YHOO) is truly not chicken scratch, although a lot of horse sense will be needed in the next few months to make that so.

(No, I could not resist.)

And, employing a video I love, if Bartz ever does succumb to the charms of Microsoft, here’s what the pair might hope that flock of attack poultry would peck at next:

Yesterday, TechCrunch’s U.K. blogger Mike Butcher spun the tale of buyer’s remorse run amok with a report that Time Warner online unit AOL was “seriously considering selling Bebo, the social network it acquired for $850 million only a year ago,” citing poor performance and a bad advertising market.

Later, AOL went on the record saying “there is no truth to this rumor,” although Butcher–in a third update to his piece–insisted otherwise from his sources.

In my favorite hedge ever, Butcher noted: “I’m not saying Bebo is formally on the block, but I am saying that a sale is something under consideration.”

Well, actually, no.

What is true, which Butcher did do an excellent job outlining, is that AOL most certainly overestimated the prospects for Bebo as an advertising and growth vehicle, hoping that Bebo’s interesting new media offerings–like its “KateModern” online series–combined with a social network, were the magic bullet.

It did not hurt that Bebo was then being sold to advertisers by its very deft top exec Joanna Shields, who is now head of AOL’s People Networks.

Thus, AOL woefully overpaid for it, especially if you look back from the current dire economic environment and also now realize that social-networking advertising is a little bit harder to get going than promised (a shock, I know).

No inside sources you talk to at AOL or Time Warner (TWX) will deny any of this today, and Time Warner CEO Jeff Bewkes has even said so publicly.

This was not exactly a secret then either. As I wrote right after the sale last March:

What’s AOL getting for its $850 million in cash to purchase social-networking site, Bebo?

A very attractive social-networking service and a very experienced exec who has been running it.

But, perhaps more importantly for those who focus on pesky numbers, not a whole lot of revenue and negligible profits, judging financial information I got a gander at, courtesy of sources at several companies that looked at funding or buying Bebo.

And the rest of the overall outlook for Bebo? A small but growing business, with nice user engagement with strong page views and minutes spent per session, but little traction beyond Britain and Ireland, and too small a presence in the critical U.S. market.

(Bebo is also strong in New Zealand, but BoomTown does not have to point out that that country is not exactly the kind of game-changer that AOL CEO Randy Falco mentioned in his email to the troops about the purchase.)”

And in another post I did at the time:

Thus, I am still trying to figure out why AOL–which was built on the pillars of community, communications and connectivity–has consistently not been able to leverage its still-valuable assets.

I suppose it is sexier to do a big, splashy deal, of course, which takes focus away–for a while at least–of the essential need to take hits, while doing the slow block-and-tackle work it will require to really build a strong ad and social network.

Buying Bebo, the third-ranked social network, for so much and trying to turbocharge it is a very lofty goal, of course, but the real problem with the acquisition is that it feels like an answer in search of a question.

While Bebo President Joanna Shields–who will enter the AOL exec team as part of the deal–and the Birches have clearly built a very interesting property, the weight of Falco’s calling it a “game-changer” on which AOL’s future rides could turn out to be much too much for Bebo to carry.

That is, especially with that heavy bag of Time Warner cash it is also shouldering.”

That’s why it takes about two seconds these days to uncover much residual anger within both AOL and Time Warner about the huge slug of cash that the company handed over to get Bebo, which mostly went to its quirky founders (who, many sources told BoomTown, thought they were underpaid!).

But, even so, that does not mean Time Warner is going to pull yet another stupid Internet trick–remember this was the company that sold itself to AOL for a song back in 2000, in what is now considered one of the worst merger deals ever–and sell Bebo for bupkis.

In fact, spending even more effort, it has been trying to use Bebo as the main vehicle to renovate all its communications assets, including its unsung AIM and ICQ instant messaging properties.

The center of the People Networks, run by Shields, Bebo is the third leg of the “new” AOL, as it has been recently touted, with its Platform-A ad unit and new niche content studio called MediaGlow as the other parts of the stool.

Will it all work? Will Time Warner change its mind? Will Shields give up? Will even the AOL brand continue?

“Who knows?” is the right answer, of course. With Facebook, MySpace, Yahoo (YHOO), Microsoft (MSFT) and Google (GOOG), as well as Twitter and FriendFeed, all vying to be the consumer’s dashboard to the Web, no one actually does.

And, if Time Warner is truly interested in selling off AOL whole, as it has been trying to do mightily, you might wonder if it would suddenly change course and dismember it now, causing even more confusion, when it is already facing so many other more pressing complications–all for a lousy price in the current weak economic landscape?

I called it “insane” when AOL bought Bebo for so much last year. I’d be dubious if it would get crazier still.

But if you want to see Shields in action–be careful, as she apparently so persuasive she could probably sell a big bailout to a Republican–take a look at this video I did a while back before the AOL acquisition:

With Yahoo earnings expected to be dismal when the company reports fourth-quarter earnings this Tuesday afternoon, new Yahoo CEO Carol Bartz is going to have to hang tough.

And she certainly seems capable of that. At her first all-hands meeting, Bartz (pictured here) said, according to one report others have since confirmed to BoomTown, that she would “drop-kick to f***ing Mars” employees who leak to the press.

That threat sent little shivers up BoomTown’s spine too, which is why it must have taken so long for her first-week missive to Yahoo (YHOO) staff worldwide to get to my inbox.

Well played, Ms. Bartz, well played. (Plus, I really am bad at football metaphors.)

But turnabout is also fair play. And that’s why I am redoubling my efforts to bring you up-to-date news from Yahoo under Bartz’s leadership, as ATD has done so obsessively during the reigns of ex-Yahoo CEOs Terry Semel and Jerry Yang (and, if you want to really date me, Tim Koogle).

In that spirit, this column broke the news last week that Zimbra founder Satish Dharmaraj and marketing exec Eric Hadley were leaving.

And the week before that Yahoo Chairman Roy Bostock was swanning around Manhattan with Microsoft (MSFT) CEO Steve Ballmer and Time Warner (TWX) CEO Jeff Bewkes.

More to come this week, for sure, as all eyes turns to Yahoo’s financial performance (which is no fault of Bartz’s, who’s just arrived but still has to deliver the news).

But until then, here’s that energetic memo Bartz sent out to Yahoo troops after her first week there.

From: Carol Bartz
Sent: Friday, January 16, 2009 3:12 PM
To: all-worldwide@yahoo-inc.com
Subject: My First Friday

Carol

Exactly what Microsoft CEO Steve Ballmer was talking to Yahoo Chairman Roy Bostock and Time Warner CEO Jeff Bewkes about last week in their mysterious New York tete-a-tete will likely be one of the many irksome questions execs at the software giant will be getting when it reports second-quarter earnings tomorrow afternoon.

Sources close to the situation said more intense chit-chatting has been going on among the trio about possible alliances and deals, but the outlook for something actually getting done is still unclear.

Oh, yes, there is also the expectation that Microsoft (MSFT) will show a missed target on its profits, as well as announce big job cuts to its 95,000-employee worldwide workforce.

Then, of course, all eyes will be on its forecast of what is to come as the econalypse continues.

There are less impressive outlooks for Microsoft’s Windows business, as well as revenue weakness, which goes right to the bottom line.

That means inevitable cutbacks in staff, as well as other cost-slashing all over the giant company in order for Microsoft to regain some momentum and revive its weak stock performance, which has been hit harder.

But what investors are actually looking for from the company–much as the nation is from newly installed President Barack Obama–is a big dose of hope and change.

In Microsoft’s case, that would still be: the articulation of a clear online strategy.

Microsoft mistakenly got everyone to focus intently on that for all of 2008 with its failed takeover attempt to buy Yahoo (YHOO), mostly for its search business, as it has turned out.

Ballmer has recently and frequently and publicly said he covets Yahoo’s search share in order to bolster his company’s distant third-place position.

Why has that been an error so far? Well, without a move at all after so much frantic and endless movement, Microsoft has only underscored its lack of strategy and its woeful position in relation to archrival Google (GOOG).

As my piano teacher used to say about me: A lot of activity, but very little productivity (and very bad music-making too).

Thus, whether Microsoft will actually produce anything more than dissonance with Yahoo or not–or Time Warner (TWX) online unit AOL either–should be the most pressing question from Wall Street.

Because, while the economic downturn will eventually pass, Microsoft will have to answer to what it has been doing all this time when it comes to Yahoo and the Internet at large.