Oct. 15 (Bloomberg) -- Time Warner Inc., the world's biggest media company, will eliminate 2,000 jobs at AOL, or 20 percent of the Internet unit's worldwide workforce, after subscriber defections led to a 38 percent drop in sales last quarter.

The latest cuts will pare AOL's staff to 8,000, down from about 18,000 employees in 2001, when the company bought New-York based Time Warner for $124 billion.

The combination led to $100 billion in losses and a more than 60 percent drop in Time Warner's stock as customers dropped dial-up Web access. AOL, an Internet pioneer created in 1985, is now trying to catch up to newer competitors Yahoo! Inc. and Google Inc. with free e-mail and search services.

``The real question becomes, how is AOL going to remain relevant long term,'' said Richard Greenfield, an analyst at Pali Capital in New York. He has a ``neutral'' rating on Time Warner shares and doesn't own any. ``We still need to understand what is the sustainability and profitability of the company.''

Time Warner shares, down 14 percent this year, fell 19 cents, or 1 percent, to $18.79 at 4:03 p.m. in New York Stock Exchange composite trading.

About 1,200 of the job cuts will come from the U.S., AOL spokeswoman Anne Bentley said.

`Smaller, Nimbler'

Cost savings will allow AOL to invest in its network for online advertising sales, Chief Executive Officer Randy Falco said today in a memo. Falco, hired by Time Warner CEO Richard Parsons last year, is leading a shift to free e-mail and Web services supported by ads after AOL lost paying customers.

``This move is indicative of AOL's continuing transition toward a smaller, nimbler competitor,'' said Laura Martin, a San Marino, California-based analyst with Soleil Securities Corp. She has a ``buy'' rating on Time Warner shares and doesn't own any. ``Costs continue to be an important focus at AOL.''

AOL may save $120 million to $150 million a year from the job cuts, assuming each worker made about $70,000 annually, Martin estimated.

Second-quarter sales at AOL plunged to $1.3 billion as the unit lost 1.1 million paying subscribers, Time Warner said in August. Advertising sales gained 16 percent.

The company last month said it would move its corporate headquarters to New York from Dulles, Virginia, to get closer to advertisers.

Ad Expansion

The move next year will be the final step in AOL's plan to become an advertising-focused company. AOL bought Tacoda, which places ads based on consumers' online behavior, this year and purchased Advertising.com, an ad-buying service, in 2004.

``This realignment will allow us to increase investment in high-growth areas of the company while scaling back in areas with less growth potential or those that aren't core to our business,'' Falco said in the memo. ``My vision for AOL is to build the largest and most sophisticated global advertising network while we grow the size and engagement of our worldwide audience.''

The company will begin notifying employees of the cuts tomorrow, AOL spokeswoman Bentley said.

To contact the reporter on this story: Gillian Wee in New York at gwee3@bloomberg.net.

Last Updated: October 15, 2007 16:15 EDT