AOL has announced it is laying off 10 percent of its workforce, claiming the tough economy has led marketers to slash their ad spending.

CEO Randy Falco has also announced a freeze on pay increases. Falco told the Wall Street Journal's All Things D blog, the move was "painful" yet prudent.

Other cost-cutting measures include consolidating facilities and leasing unused space in its US headquarters, as well as conducting a review of its international operations and global shared-services functions, and all of its products and services, to improve operational efficiency.

"With these and other changes, we will take significant annual run-rate costs out of our business while, importantly, retaining the flexibility to invest in our growth strategy," Falco said.

Although Falco is blaming these belt-tightening measures on the current economic crisis, AOL has been generating disappointing advertising revenue for most of his tenure at the helm.

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Falco replaced Jonathan Miller, who engineered the AOL business transformation from one based on subscription fees to one based on advertising, in November 2006.

While Miller had years of experience in the internet market, Falco - a TV industry veteran who had been president and chief operating officer of the NBC Universal Television Group - had virtually none.

Miller, who was unexpectedly fired, grew AOL's ad revenue 46 percent in quarter three of 2006. For the 2006 fiscal year, AOL had ad revenue growth of 41 percent, faster than the 35 percent growth of the overall US online ad market at the time.

Under Falco, AOL has routinely failed to grow its ad revenue on par with the industry average. In October 2007, AOL laid off 2,000 employees, which at the time represented 20 percent of its staff.

In the third quarter of 2008, AOL's revenue fell 17 percent to $1.01bn from $1.22bn in the same quarter in 2007. Specifically, AOL's ad revenue fell six percent, while the US online ad market saw spending grow 11 percent during the third quarter. AOL's adjusted operating income before depreciation dropped to $98m from $428m.

Last month, Time Warner, owner of AOL, partly blamed the company for a downward revision of its financial forecast for the 2008 fiscal year. Time Warner said that, due in part to a $25bn  asset write-down involving AOL and other units, it will post a net loss for 2008, whereas before it had expected to earn between $1.04 and $1.07 per share. It will announce its 2008 financial results on February 4.

Time Warner also revised downward its growth forecast for adjusted operating income before depreciation and amortisation, blaming AOL's disappointing ad revenue.

"With your continued hard work and dedication, we will position ourselves to emerge a stronger company ready to lead in a vibrant online market," Falco added.

See also: AOL upgrades webmail service