AOL: Where it all went wrong

Last year AOL finally parted company with Time Warner after one of the most disastrous mergers in business history. Since buying Time Warner for $160 billion in 2001, AOL has hemorrhaged cash and market share after a string of bad decisions stemming from faulty predictions about the direction of web growth.

Now Bebo, the Internet social networking site, is sinking fast making AOL's purchase of the firm in 2008 for $850 million look like yet another colossal misjudgement as the social network has fallen from 40 million monthly unique visitors, when it was acquired, to just 12 million today.

Eyebrows were raised when AOL Time Warner (as it was then) decided to shell out almost a billion dollars for the second-rate social network that was loosing users by the millions to networking behemoth Facebook. The story goes that AOL seriously misjudged the age of Bebo's audience when they bought it, thinking it was much older than it actually was.

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Bunch of tweens: Not a great strategic asset

Business Insider relays the story told by a former AOL exec, of the moment Bebo CEO Joanna Shields explained to AOL's senior management that Bebo users were actually a lot younger than they had thought:

"Months into the purchase, Shields met with [AOL president Ron Grant] and company, and had to bring forward the news that the Bebo user demographic was actually materially younger than what they thought (and it became immediately apparent to all, upon hearing, that it meant bad news for the ad revenue potential).

"Not sure what they were doing, user-metric-wise, pre-sale, that led them to believe the average user was older, but having a bunch of tweens isn't a great strategic asset (after all, there are only so many Miley Cyrus DVDs you can sell."

This has undoubtedly lead to rumours of AOL offloading Bebo, some say a figure of around the $200 million mark is likely. If they were to sell Bebo it would be a clear admission that the original purchase was a terrible error - having to get rid of a product they shelled out just under a billion for only two years later.

Also company execs Ron Grant, Randy Falco, and, to a lesser extent, Jeff Bewkes staked their reputations on justifying that $800 million price tag, so selling Bebo could be unlikely.

So, what's the alternative? Well, despite Bebo's remaining value AOL’s best financial option will likely be to abandon it, rather than sell it. Due to complicated corporate tax laws, AOL are able to write off the full purchase price of Bebo if they declare it worthless and abandon the asset. With AOL’s effective tax rate of around 45 percent, that’s $380 million and change in their pocket in taxes that they’d be able to avoid.

But unfortunately AOL have previous experience when it comes to bad business decisions and have really messed things up considering that at one time they were THE internet provider... they simply lacked the vision to capitalise on the position as soon as other majors entered the market.

The accompanying infographic plots AOL's downfall, allowing to pinpoint where they went wrong.

As Bebo looks set to become extinct in the coming weeks, AOL are just going to have to admit that they got it very wrong.

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Daniel Jones

Daniel is a Politics and Philosophy graduate from Cardiff University where he also worked as a section editor on the award winning student newspaper. After university he joined an IT support company where he was a B2B online writer. He loves anything to do with sport and joined GDS in July 2009.

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