What's next for Bebo

September 15, 2010: 2:29 PM ET

AOL sold it for 1/85th what it paid for it. Now it's got new leaders who seem to be sure of only one thing: AOL is to blame for all their troubles.

From left: Bebo CEO Adam Levin, Chief Products Officer Kevin Bachus

One day you're in, and the next, you're out.

At least that's how social media works. The Facebook of today invariably becomes another Friendster, a faded A-list property whose best days are behind it. But what about the rising stars who never fulfill their potential? At least one, Bebo, now under new ownership and with a management team of tech veterans, is hoping that redemption is still possible in this world.

When AOL (AOL), then a division of Time Warner (TWX), snatched up Bebo in 2008 for a shocking $850 million, the social landscape remained somewhat fluid: MySpace was king of the hill -- though Facebook would surpass it in April of that year -- Twitter was still taking off, and a crop of networks like hi5 and Tagged held promise. At the time, Bebo was the second largest social network in the UK, which goes a ways to explaining why AOL was willing to spend so much cash (about half of Time Warner's total cash holdings in the first quarter of that year) to buy it.

That bet, of course, never panned out. Facebook and Twitter exploded, and Bebo didn't. In hindsight, AOL's acquisition of the overvalued company is considered by some as one of biggest industry blunders in recent memory. AOL was soon spun-off from Time Warner and the new CEO Tim Armstrong, who wasn't with the company at the time, called the acquisition a mistake and a "major distraction." (When reached for comment, Time Warner stated the company was not involved in how Bebo was run and did not play a role in its sale.)

Rather than shut it down, AOL sold Bebo to Criterion Capital Partners for a reported $10 million in June, or 1/85th of what it had shelled out for the network in the first place. The private equity fund installed a new CEO, Adam Levin, who hired some new high-profile talent: hi5 co-founder Akash Garg, former Danger executive Aren Sandersen, and most surprisingly, last week's announcement of Xbox co-creator Kevin Bachus. Bachus joined because despite Facebook's dominance, he thinks social networks are beginning to specialize, and with Bebo, there's the opportunity to develop new creative content and experiment with different social behaviors.

When Levin arrived, the picture wasn't pretty. Bebo was hemorrhaging users, and what users were left -- more than 10.6 million monthly active members now -- supposedly perceived the site as feature-stagnant. Levin blames AOL for that.

"AOL didn't put in the resources or give it attention," he says. "They stopped signing new agreements, releasing new product functionality and really just kept the staff to operate and maintain the site, but not to push the site forward." He insists that AOL saw more value in a tax write-off than in properly investing resources into the service. AOL declined to comment when reached, but in an internal memo Armstrong sent to all AOL employees last June, he stated the sale would enable Criterion to bring new possibilities and experiences to Bebo but also admitted the transaction would create a meaningful tax deduction that would strengthen the company's financial position and give shareholders added value.

In contrast, Criterion saw a company with a significant user base that if run independently and operated as a niche site, could "make sense." In the short term, the new leadership board is focusing on better video support, better sharing and chat systems, and more satisfying gaming experiences. The goal is to bring the network to parity with the competition.

"We've changed a lot of the functionality," continues Levin. "Under AOL, Bebo was forced to work a lot with AOL portfolio companies, which inhibited its revenue, so we changed a lot of providers." To date, the company has relied primarily on ad-based revenue, a strategy that will continue with the addition of social currency, or the monetization of its new games platform.

To the group's credit, the situation appears to have improved somewhat: Bebo experienced 35% month-over-month growth in users growth since Levin stepped in, and third parties are interested in partnering up. (Levin won't name names.)

Still, the chance of a comeback is remote, at best.

Chalk it up to a management group that's been in place for only three months, but when asked about the long term, executives offered few concrete details. The group would like to be profitable and have a decent market share, but that's a desire shared by every other company out there, tech-based or not. Bachus says he's considering different options, like applying game-like mechanics and behavior. He also emphasizes that Bebo's small staff -- about 30 employees in San Francisco and the UK --was  as an asset that encourages agility and adaptability. But the question of what Bebo really stands for is clearly one that can't be answered yet.

For Bebo to be a successful product in a sector dominated by extremely successful products, Bebo must do more than match competitors feature-for-feature: it needs to differentiate.

"At some point, they've got to draw some point of distinction," says Forrester analyst Augie Ray. Bebo must create something niche for a specific audience, and be very effective at it. Take deviantART. The niche online community that launched in 2000 and caters to user-created artwork, still hums along with a respectable 11 million active users.

It's quite a comedown: a company that was nearly a $1 billion player is now angling for a niche to call its own.

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About This Author
JP Mangalindan
JP Mangalindan
Writer, Fortune

JP Mangalindan is a San Francisco-based writer at Fortune, covering Silicon Valley. Since joining in 2010, he has written on a wide array of topics, from the turnaround of eBay to the evolution of net neutrality. A graduate of Fordham University, Mangalindan has also written for GQ, Popular Science, and Entertainment Weekly.

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