By Dan Mitchell
September 1, 2011

FORTUNE — Tim Armstrong, the CEO of AOL (AOL), is a romantic. That’s laudable, not to mention rare in modern American business. Unfortunately, modern American investors don’t look favorably on romantics if they can’t bring profits along with their lofty ideals — especially modern American public investors.

Private investors aren’t much better, but they’d probably at least give Armstrong a better chance of realizing his romantic dream: to build the first great Internet media empire. As he was shepherding AOL through its public spinoff from Time Warner (TWX) two years ago, Armstrong said he meant to turn the company into the 21st century’s Disney (DIS). Oh, and also the 21st century’s CNN. He invested in real reporting at a time when storied magazines were shedding jobs by the hundreds. Romantic.

Sadly, times have not been hospitable to Armstrong’s vision. AOL lost $11.8 million in its second quarter, and while ad revenues were up for the first time in the young spinoff’s history (by 5%), they aren’t anything close to what investors want or expect. The stock, which peaked in April 2010 at $28.45, is trading just north of $15 –- and that’s up on the news Wednesday that AOL is in talks for a private takeover. The New York Post reported those talks, with one source telling the paper: “It doesn’t help to be doing a turnaround in public. They could be more bold and take more risks.”

Armstrong’s dream, indeed, is also a giant risk –- one that is unlikely to ever gain favor with public shareholders. With Patch, he’s trying to build a national network of local news sites. It’s an incredibly expensive, highly uncertain undertaking, but Armstrong still seems determined to make it a cornerstone of AOL’s strategy. In reporting the company’s dismal second-quarter numbers earlier this month, Armstrong said a turnaround would take until 2013. He might as well have said: “Sticking with our strategy while remaining a public company just isn’t going to work.” AOL can do one or the other, but not both.

Besides going private and relying on the patience of, say, private-equity shop KKR (KKR) (which is reported to be interested), AOL could sell itself in whole or in part to a company like Yahoo (YHOO) (which could work, or could simply be adding trouble to trouble), break the company up and sell off the pieces, or close down Patch. It could also sell off its dialup business, which provides cash flow, but is nearing the end of its useful life. As Felix Salmon notes at Reuters, the dialup business is perfect for private equity. It’s still generating lots of cash and margins are thick. It’s “ripe for a managed decline,” Salmon writes.

Closing Patch, which operates in 850 towns around the country, would make AOL instantly profitable. But that wouldn’t hew to Armstrong’s dreams. He insists that in the long term, local news will work online. The Huffington Post, meanwhile, is doing well, with traffic up 12% since AOL acquired it in February. But that site, which long relied on inexpensive content to draw high volume, is spending big on staff now just like Patch.

Web-media success stories up to now have nearly always involved low-cost, small-staff operations. Armstrong believes that spending for quality content will eventually pay off. It’s the most uncertain aspect of his dream — and also the most expensive.

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