• by Gavin O'Malley  @mp_gavin, March 14, 2008

Betting on Bebo to reach increasingly social-centric Web users, AOL has announced plans to buy the nation's fourth-largest social network for $850 million.

"Bebo will be the cornerstone of our strategy to transform online experiences for advertisers, media companies, and consumers," said AOL head Randy Falco during a Thursday morning press call.

By Falco's estimate, Bebo's worldwide community combined with AOL's AIM ICQ instant messenger users equal about 80 million unduplicated unique visitors.

Stateside, Bebo is the fourth-largest Web community--behind MySpace, Facebook, and MyYearbook--and accounts for just 1.15% of all visits to social networks, according to Hitwise.

Industry insiders took the news in stride on Thursday. "AOL's obviously bulking up in the ad space," reasoned Bernard Gershon, senior vice president and general manager of corporate strategy, business development and technology at Disney Co.

A number of companies, including Google, were rumored to be eyeing Bebo. Its president, Joanna Shields, said Thursday that "multiple parties" had expressed interest in the business.

One key factor in choosing AOL was its ever-expanding ad platform, said Shields, explaining that Bebo was looking to buy a small ad company before the AOL deal came into view.

Yet, whether AOL can effectively monetize Bebo--and without alienating its community--remain open questions.

"The key to truly unlocking the value of social networks lies in having a robust monetization platform that encompasses all the key display advertising capabilities," said Falco. "And that's exactly what we've built with Platform-A."

AOL's Platform-A ad serving network is still a work in progress, however, having just this week lost its president, Curt Viebranz, for failing to align its assets quickly enough.

Some also argue that Platform-A is weak in the increasingly decisive area of online video advertising, where its Lightningcast unit has made limited headway.

"They're having problems right now, and I think Bebo could have chosen a better partner to monetize video," said Neil Sequeira, a partner at Massachusetts-based venture capital firm General Catalyst.

Ron Grant, AOL's president and chief operating officer, pointed to Bebo's existing engagement marketing services as central to its future monetization strategy.

"The centerpiece of what we'll be doing in terms of the monetization will really be around the engagement marketing that Bebo pioneered," Grant said Thursday.

"What they take advantage of is the average of 40 minutes a day that people spend on the site--basically high-engagement--that is something that has been very attractive to global media companies." (According to Hitwise, the average time spent on Bebo is 30 minutes and 26 seconds, just seconds longer the MySpace's average of 30 minutes and 7 seconds.)

Said Shields: "Hundreds of brands and organizations from Apple to Nike, to P&G to the Red Cross, are moving beyond one-off campaigns to using Bebo as a platform for long-term conversations with consumers."

Still, Bebo's U.S. traffic numbers have dropped 23% year-over-year, according to Hitwise. If only for this reason, analysts on Thursday questioned whether AOL is paying too much for Bebo.

Falco defended the cost of acquisition, saying: "We think it's an excellent asset at a great price."

Onlookers, he added, will have to trust in his judgment for the time being. "We, I think, have a proven track record of spotting value."

While Shields will stay to run Bebo, the future of founders Michael and Xochi Birch remained unclear on Thursday.