Virginia, home to AOL, the troubled web giant, calls itself “the show-me state”. It’s a motto that Tim Armstrong, AOL’s boss, is keen on quoting and, as he is the first to admit, a challenging one to live up to.

The 38-year-old former Google executive rang the bell to open the New York Stock Exchange last Thursday, marking AOL’s first day of independence since its disastrous marriage to Time Warner 10 years ago next month.

“Today marks a rebirth for the company,” Armstrong said last week. “America Online was one of the companies that put the most people online. I think we see the future of the internet being just as exciting.”

There is no arguing that AOL introduced a generation of people to the internet. In 2001, AOL had more than 30m members who used it as their first port of call on the web. It is still one of the biggest web firms on the planet, with 250m visitors a month, but its business is dying, according to analysts.

AOL’s original business, selling dial-up web access, is disappearing as people switch to broadband. At its peak, the company generated $9 billion (£5.5 billion) in annual revenue, with subscribers contributing the bulk of that money. Today AOL has only 5m subscribers. The company will still generate about $3 billion this year, according to Larry Witt, a Morningstar analyst, but as broadband internet penetration rises, he expects AOL’s subscriber base to fall and its revenue and profits to shrink with it. Armstrong’s ironic solution is to turn AOL into a 21st century Time Inc, precursor to AOL’s old partner Time Warner. The new AOL will be a web company producing its own content and making a living selling ads on the back of it.

“Content, advertising and communications” will be the backbone of the new AOL, said Armstrong. “The 1990s were about access, this decade has been about platforms with companies such as Google, Facebook and Twitter. We believe the next wave of the internet will be about content.”

AOL owns a portfolio of websites including Moviefone, Popeater, Engadget and Mapquest. It had to leave with Time Warner the popular celebrity gossip site TMZ, but still owns Bebo, the social networking site.

AOL has been hiring top journalists and is producing 80% of its own content, but critics worry that ad sales alone are unlikely to keep it in the top tier of net firms as its old business dies off. Advertising on the web has been hit hard by the recession. For the first nine months of this year, AOL’s revenue dropped 24%, to $2.4 billion, while operating profits shrank 34%, to $765m.

“I have dubbed their strategy ‘niche at scale’,” said Ben Schachter, an analyst at Broadpoint Amtech. “It seems to me they are trying to build a lot of niche content sites and sell across all of them. I am not a believer in that strategy. They will have a difficult time competing against all the content that is out there and differentiating themselves.”

Schachter said that about 10% of visitors to AOL’s sites were probably coming from their old access business. As they fall away, so will AOL’s audience. “If they can’t get the audience metrics going in the right direction, nothing else will matter,” he said.

Even if the advertising market picks up, the firm faces another hurdle. Next year, AOL will have to renegotiate its search advertising deal with Google, which powers web searches on the site. When AOL signed its deal in 2006, Google was still growing its business and had about 45% of the search market. Today that figure is closer to 65%. Witt said Armstrong is unlikely to get the same terms this time. Witt reckons search accounts for about a third of AOL’s ad sales, leaving the firm with another potential area of loss.

“Search is an important part of revenue but it’s not what we are betting the whole company on,” said Armstrong. While he didn’t name names, he said there were others in the market interested in the deal, most likely Bing, Microsoft’s rival to Google.

Armstrong is a force to be reckoned with: he was a key player in the building of Google’s advertising business. His arrival at AOL’s head office was greeted with a standing ovation and he is driving innovation in advertising.

AOL is building “hyper-local” content and advertising aimed at smaller communities and their advertisers. The company has also won fans with the introduction of technology that gives advertisers real-time feedback on their ads, but as the company approaches its 25th birthday next year, he has a lot to prove. “If it wasn’t for AOL’s history, people wouldn’t care at all,” said Witt.

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