AOL to Buy Social Network Bebo For $850M

So AOL didn't do a deal with Yahoo as rumors suggested. Instead, the company moved to beef up its online ad presence by acquiring London's most famous social network.

AOL, which has been struggling to reposition itself as an Internet company, agreed to buy London-based Bebo for $850 million in cash.

Bebo ranks third behind MySpace's 110 million users and Facebook's 66 million-plus friends with 40 million users. AOL already enjoys about 40 million users of its AIM and ICQ instant messaging networks, so getting Bebo will help double its reach.

AOL officials said on a conference call March 13 the deal, in the works for the last five months, will make the New York-based company a leader in social media, which many experts believe is a ripe orchard for growing the digital ad market. eMarketer expects advertisers will plunk down $4.1 billion worldwide for social network advertising by 2011.

AOL Chairman and CEO Randy Falco said AOL plans to use the Platform A capabilities to serve targeted ads to Bebo's users.

"[The acquisition] is game-changing for AOL. It puts us squarely in a leading position in social media at a time when it's growing at a fantastic rate," Falco said on the call. "This positions us to offer advertisers even greater reach and marketers significant insights into the desires and needs of consumers.

All About the Platform

Next to its user base, Bebo's gem is Open Media, a platform the company launched last November that lets Bebo users include premium music and video content in their profiles.

Moreover, professional content creators and media companies can use their own media players in Open Media to distribute content and sell ads along with it.

Bebo appears poised for greater growth. The company is launching its own developer's platform this year to rival Facebook, MySpace and others in letting programmers build applications for Bebo.

Moreover, Bebo is joining OpenSocial, a set of common APIs for building social applications across the Web, which will allow the applications built on its platform to run on other social sites that leverage the OpenSocial APIs.

Bebo could be what AOL needs to breathe life into its sluggish Platform A ad platform, which has not paid the dividends the company officials expected since they launched it last year. AOL's ad growth has been flat and has been struggling to compete with platforms from Google, Yahoo and Microsoft.

Earlier this week, Jeffrey L. Bewkes, the chief executive of AOL parent company Time Warner, acknowledged weakness in the business and told The New York Times he was open to combining AOL with another company. Bebo would appear to fit the bill in the short term.

Falco on the conference call objected to a journalist's suggestion that AOL is paying too much for Bebo, noting that the half dozen online ad-oriented companies the company bought last year to forge Platform A cost just $1 billion combined.

Conversely, Microsoft paid $6 billion for aQuantive last year and Google just shelled out $3.1 billion for DoubleClick.

AOL said it expects to close the deal in the next 30 days, with current Bebo President Joanna Shields continuing to run the social network, reporting to AOL President and COO Ron Grant. AOL plans to retain Bebo's roughly 100 employees in offices in the United Kingdom, San Francisco and Austin, Texas.