Web company AOL is a quarter of the way through discussions with parent Time Warner Inc about its capital structure ahead of its spinoff by year-end, Chief Executive Tim Armstrong said on Monday.

Armstrong said the companies must still determine the amount of debt AOL will carry on its balance sheet, but expects a decision by next month.

The discussions are part of the company's Project Everest covering its financial projections and its management reorganization plan. Analysts at Citigroup have estimated that AOL will have around $1 billion of debt and a market capitalization of about $4 billion.

Former Time Warner Cable executive Arthur Minson started as AOL's chief financial officer this month and is involved in the process.

The struggling Web pioneer will become an independent company focused primarily on advertiser-supported content at a time when the recession has hit the once fast-growing online ad market.

AOL is pushing its new strategy at New York's Advertising Week with a campaign aimed at winning over major advertisers.

We're going to be hustling really hard over the next 18 to 24 months to reach out to advertisers, said Armstrong.

AOL announced an agreement with retailer Ikea signaling the kind of premium-priced deal it wants to sign in coming months with major advertisers that have previously made a major commitment to the Web.

Armstrong has said he wants to shift the emphasis from selling lower-priced ads through advertising networks to selling more premium-priced ads on its pages in partnership with big brands and their media agencies.

But Brigantine Advisors analyst Colin Gillis said AOL's strategy would be swimming upstream in a market where prices are more likely to fall than rise.

The reality is the pricing of premium display ads are going to level out, Gillis said, adding that prices must fall for sites like AOL and Yahoo Inc to win more advertising dollars from traditional media like television.

The game is to serve ads to audiences, not pages, he said.


As part of AOL's drive to win advertisers, it has focused on ramping up its content division, which includes names like TMZ, Engadget and AOL Music.

AOL's MediaGlow now produces around 75 percent of its own content, up from just 30 percent a year ago, said Bill Wilson, the unit's president. It now has nearly 2,000 freelance and full-time contributors to its collections of blogs and sites around which it hopes to sell advertising.

Time Warner hired Armstrong from Google in March to lead AOL. While at Google, he had led the search giant's North American sales operations.

In recent weeks, Armstrong has reshuffled his management team as he prepares the one-time Web leader for life without a large parent. He eliminated the position of chief operating officer last week. Earlier in the month he named former Yahoo executive Brad Garlinghouse as president of the Web and mobile communications group.

(Reporting by Yinka Adegoke; Editing by Lisa Von Ahn)