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AOL Layoffs Highlight Time Warner's Quandary

Plans to cut 20% of the Web firm's workforce come amid pressure for the media giant to unload the business.

News of more layoffs at AOL came as no surprise on Wall Street, where recent setbacks for the beleaguered Web concern have convinced many investors that its media-giant parent,

Time Warner


, needs to get rid of the business.

Tricia Primrose, a spokeswoman for AOL, confirmed Monday that the company will be laying off roughly 2,000 employees -- a fifth of its total workforce.

AOL already slashed 5,000 jobs last year as it embarked on an effort to transform the business from a subscription-based model to an ad-supported model more like


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While the shift was a welcome move on Wall Street, doubts about whether it would succeed proliferated after Time Warner reported that AOL's ad sales growth slowed in the second quarter to 16% from the roughly 40% it had logged in the previous four quarters. The company also said it expects the slowdown to continue for the rest of the year.

"Laying off a couple thousand people after you missed the quarter and lowered the year's expectations is not generally a sign of strength, but I think we need to hear more details about what they're doing," says Pali Research analyst Richard Greenfield.

Primrose says the job cuts will be coming from "across the board."

"We've taken a look at the entire organization, and the real emphasis has been on can we stay competitive and operate effectively across the company," says Primrose. "As we complete our transformation to an ad-supported Web company, we have to make sure that our resources are aligned with our new business mode."

In addition to its changing business strategy, AOL recently announced that it is moving its headquarters to New York City from Dulles, Va.

A source familiar with the situation says the job cuts will be completed by the end of the year. In the U.S., 1,200 workers will lose their jobs. The bulk of those will be notified on Tuesday, and 750 of them are located in Dulles.

Even after the jobs cuts take place, AOL's office in Dulles will be its largest in the world, home to roughly a third of its work force.

Investors have speculated that the fate of AOL will be decided after Time Warner CEO Dick Parsons steps down. Parsons has said he will be handing over the reins of the company at some point to its president, Jeff Bewkes, but no timeline for the transition has been forthcoming.

In the meantime, analysts say that cost-cutting cannot drive the levels of sustainable growth at AOL that are needed in order to drive up Time Warner's stagnant stock price. In a recent research note, UBS analyst Michael Morris said that he doesn't anticipate any revenue growth from AOL next year, and he's not expecting "material growth in consumer use of the AOL properties."

Martin Pyykkonen, analyst with Global Crown Capital, says the job cuts at AOL are a necessary step for the company.

"Everyone is looking for AOL to be a bigger contributor to operating income, and you're not going to get there at this point unless you prudently look at the cost structure," says Pyykkonen. "That said, this does underscore that it's becoming more of a challenge to manage AOL to the profit level that people are expecting."

Shares of Time Warner were recently down 18 cents, or 0.9%, to $18.80.