Fortune
 Fortune editor at large
March 14, 2008: 10:04 AM EDT
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AOL's plan B-ebo

By melding social networking with its advertising business, AOL becomes more attractive to potential suitors.

By Richard Siklos, editor-at-large

(Fortune) -- Ever since Microsoft (MSFT, Fortune 500) announced its surprise bid for Yahoo (YHOO, Fortune 500) last month, the heat has been on Time Warner to figure out its next move for AOL, the former Web juggernaut that could be left out in the cold if its two main rivals merge.

On Tuesday, Jeff Bewkes, Time Warner's (TWX, Fortune 500) new CEO, told a media conference that the company would consider any options to sell or merge AOL. "We can't rule it out and we wouldn't," Bewkes said. "It's our obligation to try make sure that AOL exists in whatever configuration makes it the strongest and most valuable."

What to make, then, of AOL's news Thursday that it is buying Bebo, the third-biggest social networking site in the United States, for $850 million in cash? While not a game-changer in and of itself, the Bebo deal means AOL has spent close to $2 billion in the past year or so on acquisitions as it races to leave behind its tangled legacy as the 1990s phenomenon that introduced much of America to the Web.

The upbeat view is that maybe there is new life in the old cow after all - particularly in the wake of a spate of high-level executive departures in its advertising business in recent weeks.

If the latest AOL plan takes hold, the company will meld its online advertising network with the reach of its AIM instant-messaging service and a bona fide social network that has some 40 million registered users worldwide. In particular, AOL contends it has a leg up over Bebo's much bigger rivals, MySpace and Facebook, in making money out of social networking.

Additionally, Bebo helps AOL achieve another goal of increasing its presence outside of the United States - the site is particularly strong in the UK and Ireland. Double bonus: It gets the services of Bebo CEO Joanna Shields, a highly-regarded former Google (GOOG, Fortune 500) executive who joined Bebo only last year, and who has agreed to stay on.

To be sure, there is a chorus of sentiment both within and outside of Time Warner that the company needs to stop rearranging the deck chairs at AOL and the sooner it extricates itself from the Internet company - either through some kind of merger, spin-off or an outright sale - the easier it will be to generate some much-needed enthusiasm for Time Warner stock.

Its shares are down 25% in the past year after several years of moving mostly sideways. (Fortune is one small piece of Time Warner, the world's largest media company by revenue. With around $40 billion in sales, Time Warner counts everything from the Warner Brothers movie studio to CNN, HBO, People magazine and America's second-largest cable-TV company among its businesses).

The less glowing but (in my opinion) more realistic way to view AOL's purchase of Bebo is that it is the equivalent of renovating your kitchen and bathroom before putting the house up for sale because your broker tells you it will sell faster and fetch more.

Bebo lags far behind MySpace and Facebook in its sector, but is a proven brand that has succeeded in a space where AOL has talked a big game but stumbled. Two years ago, the company launched something called Aimpages which were designed to be its answer to MySpace, designed around niftily tying into people's existing buddy lists on AOL's Instant Messenger (AIM). Needless to say, we have not heard much about Aimpages since.

But in making this deal at the same time it is trying to figure out if there is a way to combine with Yahoo and thwart the Microsoft (MSFT, Fortune 500) deal, Time Warner also gets to send the message that AOL is not standing idle.

AOL is still a big business, generating $5 billion a year in revenue from a combination of Web advertising and subscriber fees from its fast-declining (yet still lucrative) dial-up Internet access business.

The biggest move Bewkes made in the months before he took the reigns at Time Warner was to accelerate AOL's repositioning as a free Web portal business coupled with an online advertising business -- now called Platform A -- that has been molded out of various acquisitions including advertising.com and Tacoda.com. He has said that the company is working to separate the access business, which many analysts expect him to sell, from the rest of AOL.

With Bebo, the company is pursuing roughly the same strategy that it did when it launched Aimpages. The idea now is that Platform A should give the AOL portal business a leg up in generating revenue for Bebo and that - once again - there ought to be some way to fuse Bebo with the sea of 27 million worldwide AIM instant messaging users.

There are, of course, a couple of catches. One is that AOL's history of integrating acquisitions has not exactly been stellar. (For every Advertising.com, there is at least one Netscape - remember them?)

The other is that it is far from proven that instant messaging and social networking really mix. Sure, they are both things that young people spend time doing. But instant messaging is right up there with China and mobile phones among new media opportunities that are forever on the verge of generating buckets of marketing dollars.

"What they're talking about trying to do is like a country doctor trying to perform brain surgery," a top executive at a rival social networking site told me.

Maybe so. Nonetheless, Bebo gives AOL more curb appeal for whatever comes next. To top of page

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