AOL jumps on social networking wave

AOL has acquired Bebo, the social network aimed at young people, for $850 million. The companies claim that the combination of Bebo's 40 million members worldwide and AOL's base of AIM and ICQ personal communications users will create an 80 million global community that will help drive future growth for both parties.

AOL is conspicuous as an online heavy weight that has not acquired or developed its own social network. Google has acquired YouTube, MSN has taken a stake in Facebook and Yahoo has incorporated social networking features across its properties, most obviously in Flickr, Yahoo 360 and Anwsers.

AOL has tried fostering a community among its instant messaging properties but it does not appear to have proved that effective and is not quite the same. Social networks are important to AOL and its rivals because they are seen as valuable advertising inventory, and advertising is what they are looking on to drive future revenue growth.

Social networks are of course not the only number in the digital advertising equation and AOL, like its rivals, has been on a digital media spending spree to the tune of an estimated $1billion by all accounts, that has seen it bag among others ADTECH, Lighteningcast, Quigo, TOCADA and in the mobile realm, third Screen Media. A social network element was the missing piece.

The $850-million price-tag AOL seems reasonable and even a bargain in comparison with the $240 million paid by Microsoft for just a 1.6% stake in Facebook. It looks like the bubble in the valuation of social networks has burst.

Overstating the case

The immediate benefit of the AOL/Bebo combo being touted by the two companies is the vaunted 80 million combined community.

This is overstating the case, as not all AOL's AIM customers will automatically be members of Bebo. But you can understand where they think the potential lies: immediate, accessible communications is the lynchpin of social networking. 

It is impossible to say at this point whether an integrated Bebo/AIM community will do the trick, but there are positive suggestions to keep in mind in the way that the tighter integration of Microsoft Windows Live Messenger and social network/bog Windows Live Spaces helped to grow latter.

Bebo is nurturing a valuable demographic. Its community is made up of children and teenagers that are literally growing up with social networking. AOL no doubt hopes that if it can capture them now, then once they have grown out of Bebo they will be well disposed to complementary AOL services and a receptive audience for future developments.

The big "If" being if AOL/Bebo can keep them engaged, particularly in an environment where there will be many tempting options in the form of more specialised networks that are more targeted or will simply be more cool.

At the same time, Bebo needed to find a partner. A challenge facing the large social networks is that their calling card in terms of revenue growth is about being big and getting bigger.  Advertising is the revenue driver and in the Internet world this has traditionally been about scale and reach.


But social networks are maturing and the competition is intensifying as consumers typically belong to more than one network, which means their engagement and loyalty to any one player is diluted. This in turn means less opportunity for advertisers to engage. The options are consolidation with something that can help you grow, and finding meaningful ways to differentiate, which is very difficult as no sooner has one innovated than others follow.

The case in point is opening APIs to third parties, which is now in place or on the cards for all of the big networks. This means that Bebo could innovate like crazy but ultimately not get very far. Becoming part of a larger group with diversified services should be helpful going forward.

Eden Zoller, Principal Analyst, Consumer Practice