Time Warner Inc.'s AOL, battling to reinvent itself, is plunging into the hot and pricey world of social networking.
AOL announced plans to fork out $850 million for Bebo, a social-networking site with a strong presence in the
The acquisition is the single biggest AOL has made in several years, as it attempts to transform itself from an Internet-access subscription business into an advertising-focused one. The deal represents a major bet that online advertising will retain its sparkle and social-networking sites will benefit.
The transaction is rooted in the belief that social networking is becoming a major gateway for how people use media and services on the Web, including email, search and video. "People are using social networks as their prism to the online world," said Bebo President Joanna Shields, a former Google Inc. executive who joined Bebo last year and is expected to remain at the helm.
The two biggest social networking sites are already largely spoken for: News Corp. bought MySpace in 2005 for $580 million, and Microsoft Corp. made a $240 million investment in Facebook Inc. last year. News Corp. also owns The Wall Street Journal.
Still, AOL's move is a risky one. Some hot Web properties, including social networks and video-sharing sites, are finding it harder than they expected to turn their heavy traffic into ad dollars, with some of the biggest sites generating less advertising revenue than hoped.
Like many of its counterparts, Bebo is more about potential than profit -- a factor that had warded off several contenders for the company, including Yahoo Inc. and CBS Corp., according to people familiar with the situation. Indeed, some analysts questioned whether AOL was overpaying.
"The price seems a bit high, and it's hard to know what AOL is getting," said Ryan Jacob of the Jacob Internet Fund, which owns shares in Google and Yahoo, but not Time Warner. Bebo, based in
The deal comes as Time Warner Chief Executive Jeff Bewkes is under pressure to kick-start the company's stagnant stock price. AOL has been one of the company's trouble spots in recent years and the focus of a major turnaround. Mr. Bewkes flagged plans last month to separate the Internet-access business from the rest of AOL. At the time, he said he was "open to any strategic moves that make sense."
AOL has recently been in talks with Yahoo over a possible alternative to Microsoft's bid to acquire Yahoo, although it is seen as having little chance of success, according to people familiar with the situation.
The Bebo acquisition raises questions about whether Time Warner is still open to selling AOL, which had been seen as a serious option. Mr. Jacob said: "AOL is clearly bulking up to make itself more attractive, either for a spin-off or a transaction."
AOL plans to twin Bebo with its chat services AOL Instant Messenger and ICQ, creating a platform that it says will reach 80 million unique visitors around the world. "Social networking was really invented here at AOL. We let it get away from us," said AOL Chief Executive Randy Falco.
Bebo, founded in 2005 by a married couple, rapidly expanded to include a range of entertainment including TV shows and music. While it is little known in the
But the biggest issue may be luring advertisers to Bebo. Ad spending on social-networking sites is still tiny and largely experimental for marketers. Expected to reach $1.6 billion in the
During its fourth-quarter earnings call on Jan. 31, Google said it was having a harder time than it expected generating ad revenue from partner social-networking sites. Its partners include MySpace.
Some of advertisers' concerns with social-networking sites stem from a lack of comfort displaying ads next to less-predictable content.
Mr. Falco says AOL can do better than Google by combining an interactive advertising approach that Bebo has developed, with AOL's existing online advertising technologies. AOL plans to use the data that Bebo users enter into the profiles they create about themselves to help better target ads both on that site and on the network of Web sites where it brokers ads.
AOL may face other challenges integrating Bebo. AOL already has stumbled in its efforts to integrate a series of smaller online ad firms acquired in the past few years. Earlier this week, Curt Viebranz was fired as president of AOL's Web ad selling unit, dubbed Platform A. He was succeeded by Lynda Clarizio, formerly president of Advertising.com.
By Merissa Marr and Emily Steel; Aaron O. Patrick, Vishesh Kumar &Kevin J. Delaney contributed to this article.
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