Bebo on Board: AOL Pays Big

The once-great Internet company needs to reestablish itself on the cutting edge. The teen-heavy social networking site should help

Anything you can do, I can do better. That's the message AOL sent to its competitors on Mar. 13 after it forked over $850 million for California online social network Bebo, the third-largest such site in the U.S. behind Facebook and MySpace.

The acquisition gives AOL's parent company, Time Warner (TWX), access to Bebo's predominantly teen audience, as well as providing a platform to compete against the other social networks in the battle for online advertising revenue. By paying top dollar for the comparatively small site, AOL—the once dominant Internet player—is gambling that Bebo can reinvigorate its online image, even as rumors abound that the company itself could become a takeover target. Web 2.0 offerings such as social networks are growing faster than their better-established online counterparts.

"This is the latest move in the land grab within the social networking space," says Alex Burmaster, Internet analyst at Nielsen Online in London. "Bebo's the biggest one left, so it's the logical step for it to be snapped up by a large Internet company." MySpace, the biggest social network with more than 110 million users worldwide, was acquired by News Corp. (NWS) for $580 million several years ago. Facebook, the second largest social network with more than 60 million users worldwide, has remained fiercely independent.

Launched three years ago, Bebo now boast 40 million users worldwide. Its growth is buoyed by its popularity with pre-teens and young teenagers, who have flocked to the site as older Internet users have turned to MySpace and Facebook. According to Nielsen Online, unique visits to Bebo in January topped 7.1 million, a 60% increase from the same period last year.

Standing Out from the Pack

While impressive, those figures are still relatively small compared with MySpace's total global membership of 100 million users. Visits to MySpace rose 13% in January on an annual basis. And Facebook, with 64 million members worldwide, booked a 200% increase in visits over the same period.

"Bebo's biggest challenge will be to differentiate itself from the likes of MySpace and Facebook," says Mark Mulligan, vice-president for research at Jupiter Researcher in London. "It has to find a way to develop specific content that will allow advertisers to use the platform to really hit the lucrative teen audience."

On announcing the acquisition, AOL Chief Executive Officer Randy Falco said he would combine Bebo with the company's popular instant messaging services, AIM and ICQ. That will help the company take advantage of new Platform A—an advertising system AOL created after spending $1 billion on a range of ad networks and serving technologies.

How to Bring in Ad Dollars

Despite plans to entice online advertisers with Bebo's young audience, it remains unclear whether AOL—or its bigger competitors—can leverage a social network's members to make a healthy return on such big investments. eMarketer expects advertising on social networking sites worldwide to increase from $2.15 billion this year to $2.89 billion in 2009.

Bebo already has partnerships with CBS, MTV, and the BBC, which AOL could broaden to include other big-name brands advertisers finding appealing. Such plans, though, depend on maintaining Bebo's popularity with its savvy teenage audience, while finding new ways to bring in the advertising dollars. After coughing up $850 million, AOL faces a challenge: balancing its own financial needs without alienating Bebo's 40 million users.

No Threat to Google

Aleksandra Bosnjak, lead analyst at StrategyEye Digital Media in London, reckons Bebo users could quickly jump ship if they think the site is becoming too commercialized. "What's fashionable today might not be fashionable tomorrow," she says. "AOL is definitely trying to get hold of Bebo's demographics, but it's unclear whether $850 million was too much to spend."

Even with Bebo on board, AOL's potential advertising clout still can't compare with that of ad titan Google. Along with its control of 60% of all searches, Google has a vast network of sites, including MySpace, on which it can serve ads. As a result, Google dominates the roughly $28 billion U.S. online advertising market, with roughly 40% of all online ad dollars running through its coffers. Only a small fraction of that amount passes on to partner sites in Google's network, according to Marketspace Advisory, a strategy consulting firm. AOL, Microsoft (MSFT), and Yahoo! (YHOO) combined account for about the same share of the U.S. online advertising business as Google, according to Marketspace.

Google's $3.1 billion acquisition of ad-serving giant DoubleClick, which received approval from European antitrust authorities on Mar. 12, promises to further cement its dominance. On Mar. 13, Google launched an ad-serving platform enabling it to deliver ads sold by Web site owners themselves. The move gave an early indication of how quickly Google could begin capitalizing on DoubleClick's ad-serving technology.

Mark Scott is a reporter in BusinessWeek's London bureau. With Catherine Holahan in New York

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