What Next for Bebo?

While the world ponders the breathtaking value destruction resulting from AOL's sale of Bebo to Criterion Capital Partners, we have been pondering the value of an ailing social network to an obscure private equity firm, one which, according to an AOL employee memo, "specializes in facilitating growth plans and turnarounds."

Since AOL acquired Bebo two years ago, site numbers have been dropping fast in the face of formidable competition from Facebook and MySpace.  AOL's $850 million bet on outsize ad revenues stemming from user growth never materialized.  Recognizing that Bebo would require a "significant investment in order to compete in the competitive social networking space,"  AOL threw in the towel in last April.

The question, then, is how does Criterion intend to realize any value from Bebo?  Assuming Criterion paid the reported amount of $10 million, that's less than $1.00/user (some media outlets are reporting a sale price as low as $2.5 million, in which case the cost/user drops to around $0.21). We've developed a few possible scenarios.

Scenario 1: 
Criterion paid less than replacement cost for Bebo.
Criterion may be planning to liquidate Bebo and sell off the underlying technology IP to the highest bidder.  The Bebo brand lacks any meaningful value.  However, given the scale, depth, and complexity of the site's architecture, the technology powering Bebo could conceivably be quite valuable to a company looking to quickly deploy a social network.

Scenario 2: 
Criterion intends to flip Bebo.
Criterion may have been in the right place at the right time as AOL was anxious to offload an underperforming asset.  Bebo's young (18-24), 12 million member user base could be extremely valuable to a trendy teen or twentysomething media company looking to buy a social media audience.  With a minimum additional investment (or maybe none), Criterion could realize a respectable return in a very short holding period.

Scenario 3:
Criterion believes Bebo can be saved in its current form.
Criterion may believe that Bebo has been the victim of uninspired management, and that, by implementing a creative, imaginative turnaround strategy, could be rehabilitated.  As pageviews have fallen off a cliff, Bebo's ad revenues have surely followed suit, so the difficulty here would be creating a unique, engaging user experience - one that is sufficiently sticky, that can be monetized efficiently (see scenario 4), and cannot be obtained via other social networks.  Perhaps Criterion intends to reinvent Bebo as a social network devoted exclusively to gaming or music or other interest.

Scenario 4:
Criterion believes Bebo can be monetized virtually.
Until recently, advertising was key to generating revenue on social networks, which meant constant pressure to grow the user base and generate pageviews.  Nowadays, however, networks are gradually diversifying their revenue stream by adopting a model driven more by user engagement.  Gifts and social games integrating virtual goods are increasingly becoming the standard for social network monetization.  This may very well be Criterion's plan for Bebo.  Given the young demographic, and the explosive growth in (profitable) social gaming, Criterion could be looking to redeploy Bebo as a game-centric social network similar to myYearbook.

Regardless of the outcome, AOL's sale of Bebo at a near-total loss serves as a cautionary tale for social network acquirers going forward, and could have a chilling effect on future transactions.