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NEW YORK (Reuters) - Forget the Michael Arrington sideshow -- AOL boss Tim Armstrong has a bigger problem, involving the "Project Devil" advertising unit.
Project Devil, which is a large-ad format with interactive panels that dominate a Web page, is still striving to gain traction among ad buyers since its glitzy debut during New York Advertising Week last September. The problem is that other websites have been slow to embrace the platform, one of Armstrong's main initiatives to boost advertising revenue.
"Project Devil has a lot of positive qualities," said Tracey Scheppach, founder of The Pool, at the digital agency VivaKi. "The hard part is finding people to use the unit."
The sluggish uptake for Project Devil could only hamper AOL's strategy under Armstrong to lessen its dependence on its fast-dwindling but lucrative dial-up business. AOL aims to do that by becoming a leading content destination on the Web, backed mainly by advertising revenue.
Project Devil's slow start adds more pressure on Armstrong, who took over a struggling AOL and since has grasped at several strategies, including splashy acquisitions -- the Huffington Post, TechCrunch -- and ambitious projects like Patch.
AOL has also been through several staff shake-ups, the last of which was an overhaul of its ad sales department and the ouster of its top salesman in July.
His latest headache involves TechCrunch founder Arrington and a controversial venture capital fund launched by Arrington and backed by AOL. Questions linger whether Arrington is still employed by AOL, given the protests about the fund's ability to invest in companies covered by TechCrunch.
Hailed as AOL's savior only two years ago, Armstrong, could find himself on the hotseat if he fails to convince Wall Street that he finally has the Internet company on the right course.
Indeed, Carol Bartz's ouster as Yahoo's CEO serves as a cautionary tale for Armstrong. Her departure was precipitated, in part, by her failure to maintain Yahoo's leadership position in display advertising.
In August, AOL reported second-quarter results that disappointed investors mainly because of weak display ad revenue growth, which forced the company to trim its operating profit outlook for the year. AOL shares plunged more than 30 percent on the news.
Part of the issue with Project Devil is that advertisers, who are pleased with the format, are reluctant to spend money building out a custom ad that only runs on AOL, said David Cohen, global digital officer at the ad agency UM. He added that he is a big advocate and partner of AOL and its efforts.
However, a handful of publishers including Hearst Magazines, the Wall Street Journal Digital Network, Meredith Corp and FoxNews.com have agreed to use the format on their own sites. Meredith, which publishes magazines such as Better Homes and Gardens and Ladies Home Journal, is still rolling out the ad units on its properties, for instance.
Rich Kim, vice president and associate media director at the ad agency RPA, thinks that about 100 of the top sites on comScore need to adopt the format before it can take off fully. Otherwise, he said, it becomes too costly to produce and place an ad that can't reach a broad audience.
"I think (AOL) is on the right track," said Kim. "I just wish something like this could be leveraged elsewhere as a more a cost effective solution for my clients. Right now it is hard justify."
Plus, broad adoption could backfire, notes Michael Hays, president of digital communications worldwide at the ad firm Initiative. "As it becomes a standard size in theory, I don't have to purchase that from AOL anymore and I can still get the bang from my buck," he said.
AOL has been pushing Project Devil on Madison Avenue and with other publishers and websites over the past year. But while the unit allows more of the innovation advertisers are seeking in their ads, it is not attracting enough eyeballs.
"What agencies are looking for is a broader canvas, and Project Devil gives us creative prowess," said Vik Kathuria, managing partner at Mediacom. "At the same time we look for reach. Unfortunately, that is where they fall behind the pack," he said, ticking off sites such as Facebook and Google's YouTube as places that command bigger audiences than AOL.
The company is currently hosting 11 campaigns from the likes of Coca-Cola Co, Procter & Gamble Co, and Kraft Foods Inc that are using the unit. Armstrong pointed out during AOL's earnings call in early August that consumers spend almost four times as long on a page with a Project Devil ad compared with industry averages.
One of the difficulties Project Devil faces involves getting websites used to the idea of replacing several smaller ads with one big ad on the page. "The commercial trade-off is that sites are going to sell one beautiful big ad as opposed to three or four small ads. That takes some courage," said Peter Minnium, consulting director for industry group the Interactive Advertising Bureau.
The IAB gave AOL a huge vote of confidence when it named Project Devil one of its "Rising Stars."
"It's still early days," the UM agency's Cohen said. "If this is a marathon, they are probably in mile three or four.
AOL declined to comment for this article.
Reporting by Jennifer Saba; Editing by Peter Lauria, Gary Hill