Last Updated: March 14, 2008: 8:19 AM EDT
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Bebo acquisition could boost AOL

Deal sees Time Warner's Internet arm continue its shift away from original subscription-driven business.

By Jessi Hempel, writer

NEW YORK (Fortune) -- AOL will pay $850 million to acquire global social networking site in an all-cash deal announced Thursday.

With 40 million members, Bebo's audience lags Facebook and MySpace (NWS, Fortune 500) in the United States, but it vies for the top spot in the United Kingdom and has a fast-growing global audience.

"Bebo is the perfect complement to AOL's personal communications network and puts us in a leading position in social media," said AOL chief executive Randy Falco.

AOL hopes to leverage its advertising sales business across Bebo's network. Time Warner (TWX, Fortune 500) owns AOL and Fortune.

Bebo will be the cornerstone to AOL's social media strategy. When integrated with instant messaging services ICQ and AIM, it is expected to reach 80 million members.

Started in 2005 by San Francisco programmers Michael and Xochi Birch, the company has approximately 100 employees.

Bebo's site looks a lot like MySpace with a cleaner interface. It has been a pioneer in combining professionally produced entertainment and user-generated content with programs like KateModern.

The show's title character, Kate Modern (whose name is a play on the famous British museum, the Tate Modern), is a waifish art student trying to make it in London. She and her friends record and post short video diaries and chat with viewers. Her popularity is one reason why Bebo's 40 million members spend an average 33 minutes on the site. Another reason is that with the launch of its open media platform in the fall, Bebo plays host to content from old media companies like CBS (CBS, Fortune 500) and MTV.

The deal comes just one week after AOL launched Open AIM 2.0, which allows developers greater freedom to develop for the AIM network and integrate AIM into its sites and applications.

Bebo has a number of pre-existing deals with AOL competitors. In September the site announced a partnership with Yahoo (YHOO, Fortune 500) to sell the site's display ads in Britain and Ireland and to integrate Yahoo! Answers with Bebo's site. That followed a Microsoft (MSFT, Fortune 500) partnership that let members IM with anyone - Bebo friend or not - on Windows Live Messenger. Shields declined to comment on what will happen to those deals.

There is much debate over how to monetize social media. Relying on advertising has thus far proven disappointing. In a March 9 interview at SXSW, Facebook ceo Mark Zuckerberg said his company, which is valued at $15 billion, was close to breaking even - another way of saying that it is not yet profitable. And Google's $900 million ad deal with MySpace isn't generating the return the company expected.

Instead, companies are looking to profit off of the applications that live atop those platforms. "We used to look at social network sites like we would any ad-supported sites, like the NYTimes," said Google's president of advertising Tim Armstrong at a Bear Sterns media conference on March 10. "Now we think differently. We look at social networks as a platform and see an opportunity to monetize widgets and social network applications."

In a best case scenario, Bebo will now be able to leverage the behavioral targeting capabilities from AOL's Platform A to better target certain demographics, and it will be able to scale to reach a larger audience with AIM. But AOL has not proven itself able to integrate acquisitions well so far. It has been on an acquisitions tear, putting down more than a billion dollars in the last few years for online advertising companies and Tacoda. But its unclear how well these properties work together, and recently the company lost Tacoda founder Dave Morgan and let go Platform A President Curt Viebranz.  To top of page

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