At AnnArbor. com’s economic outlook luncheon on March 11, Governor Rick Snyder praised the website and newspaper as an example of the “reinvention” the state needs. Afterwards, photographer Lon Horwedel shot a photo of Snyder with AnnArbor. com CEO Matt Kraner. It turned out to be Horwedel’s final assignment: that afternoon, he was laid off.

During the luncheon, “they were talking about how great things were going” in the local economy, Horwedel recalls. “The website [was] going great. Then they laid off half their [editorial] staff.”

For Horwedel and several others, it was the second layoff in less than two years–they’d also been among the 214 workers who lost their jobs when the Ann Arbor News closed in July 2009. For another News veteran, AnnArborChronicle. com publisher Mary Morgan, that triggered a “sickening sense of deja vu. It was two years ago this month,” she noted in a column, “that the out-of-state owners of our town’s daily newspaper announced their plans to close the business, tearing apart the lives of its workers.”

Kraner says laying off six full-time and six part-time staffers was difficult, but necessary to eliminate sections that had failed to win over readers and advertisers. “Do we continue to invest in areas that … after a year and a half do not prove to be sustainable?” he asks rhetorically, “Or do we structure our organization and focus energies on areas that show high growth? That was the decision that we made.”

Kraner says the layoffs weren’t done to save money, and that the real story at AnnArbor. com is the website’s “excellent, excellent growth.” He says online advertising rose 75 percent in January and February compared to a year earlier, and traffic increased 51 percent, citing data from a company called Omniture.

But that traffic wasn’t distributed equally over the site. So Kraner and content chief Tony Dearing say they’re reorganizing to concentrate on what interests readers the most–crime, education, business, and sports. “We will create good local journalism and lots of it–that’s where we see the greatest growth,” says Kraner.

Yet they’ll do so using a news staff that’s at least one-third smaller. Almost all those laid off were from the editorial or community areas, including blogging leader Ed Vielmetti and general assignment reporter James Dickson. Kraner says the staff now numbers sixty-four, which he notes is more than the sixty-one people on the payroll when AnnArbor. com launched in July 2009. But others point out that the head count peaked at more than eighty, and a comparison of before-and-after staff lists reveals a cut of 18 percent.

Three more people left just before the layoffs. News director Amalie Nash, education reporter David Jesse, and Stefanie Murray, AnnArbor. com’s “director of real-time community engagement,” all moved to the Detroit Free Press. None of the three would comment on their well-timed departure, and Kraner says all will be replaced.

The other jobs are gone for good. Entire areas of the website went dark as the layoffs happened, including the teen section, books, neighborhoods, and “passions and pursuits.” Other areas are still under review, among them prep sports. “It’s difficult to predict what our business will look like a year from now, let alone five years,” says Kraner. “As any Internet entrepreneurial company, we have to be pretty nimble and respond to the market.”

Not surprisingly, the departed staffers don’t buy Kraner’s positive spin. The layoffs “are pretty solid proof that things aren’t going so well,” says one.

“I have no idea whether they’re making money or not,” says another. “I know everyone did a lot of work” and that workload was increasing. This person notes that since AnnArbor. com launched, new competitors have emerged: “It has to sell against Groupon–and Groupon’s copywriters are funnier than [AnnArbor. com’s].” Kraner says response to its Groupon-like “Real Deal” is improving.

Asked whether everything Annarbor. com does has to generate traffic or revenue or both, Dearing says some sections–including faith coverage, pets, and food and drink–are “not dollar-and-cents issues. We will cover them at a lesser level than we do now, more in line with the interests” readers have shown. Possible additions in the months ahead include more surveys, a souped-up weather page, mobile phone apps, and new, advertiser-friendly features like groceries.

Even as it reports strong gains in ad revenue, AnnArbor. com may also be starting to consider a revenue source already in use at more traditional newspapers: moving some online content behind a “pay wall,” limiting access to paid subscribers.

If the layoffs weren’t done to save money, does that mean AnnArbor. com is profitable? Says Kraner, “I will never answer that.”