Bebo's friends desert it

Last year, a shadowy website was launched to offer those weary of social networking an easy way out. Anyone who wanted to kill off their Facebook profile by sending a "cease and desist" letter to the site's creators could go to Seppukoo.com to commit online suicide in the style of a Japanese samurai warrior. AOL may be preparing to do just that with an entire social networking site, and could close down Bebo by the end of May.

Jon Brod, the executive vice-president of AOL Venture, sent a memo to employees on Tuesday night, saying the company was preparing an annual filing in which it "will indicate that it is currently evaluating strategic alternatives, which could include a sale or shutdown of Bebo in 2010". A change in management at AOL last year, a lack of investment and the strength of Facebook have all contributed to Bebo's sharp decline.

"Bebo, unfortunately, is a business that has been declining and, as a result, would require significant investment in order to compete in the competitive social networking space," Mr Brod said.

Ray Valdes, the vice-president of web services at Gartner, was not surprised by the announcement. "Bebo has lost momentum, focus and agility," he said. "There was no surprise that AOL is looking for a way out; the only surprise was the harsh tone of the memo. That won't help a sale." The review is to be carried out internally and Bebo's staff will know the site's fate by the end of next month.

It marks an extraordinary collapse in fortunes for the company. Bebo was founded by Michael Birch, from Cuffley, in Hertfordshire, and his wife Xochi, an American he met in the bar of Imperial College, London. The couple moved to California in 2002 and, after a string of online ventures, launched Bebo in January 2005. They bought the name and then retro- fitted it as an acronym meaning "blog early blog often". A year later, it was receiving more hits in the UK than either Amazon or the BBC website and boasted 21.4 million registered users worldwide.

The growth convinced AOL to buy Bebo for $850m in 2008. The US internet site had come late to social networking and hoped the service which had proved so popular in the UK would take off to a similar extent in America. Eden Zoller, an analyst at Ovum, said: "The original motive to buy Bebo made sense at the time. In 2008 it was up and coming, growing well and had a targeted an attractive demographic. Facebook wasn't the huge animal it is today either."

The deal turned sour pretty quickly, however. Just a year later, rumours surfaced that Bebo was up for sale at a fraction of the cost after growth had stagnated. Ms Zoller said: "AOL hasn't known what to do with Bebo. It hasn't invested heavily in the group and rather left it to do its own thing, which is not enough to succeed in social networking."

She added that there did not seem to be a natural fit between the demographics of the two companies. Bebo was also affected by problems at AOL, which finally demerged from its disastrous deal with Time Warner last year. AOL's chief executive, the Google veteran Tim Armstrong, decided the company needed to overhaul its strategy and focus on its strengths. Bebo was not deemed one of them.

The site has been haemorrhaging users for more than a year. In December 2008, it had 10.5 million unique visitors in the UK, according to the web traffic analyst ComScore. That had fallen to 3.8 million two months ago. Worldwide, the site has shed 10 million unique users over the same period, falling to 12.7 million unique users in February. Facebook, by comparison, had 462 million. Bebo was targeted primarily at schoolchildren but they have been migrating to Facebook, which is seen as cooler. Bebo also failed to support some of the most popular social networking games, such as those developed by Zynga, which have a huge following on Facebook – the rival that is hammering the nails into Bebo's coffin. "Facebook took risks and was very focused," Mr Valdes said. "None of its competitors has had its drive."

Bebo's founders left shortly after the sale, as did senior managers including the chief executive Joanna Shields, who later joined Facebook. AOL failed to replace her for a year and the business felt as if it had lost direction, according to experts.

Andrew Thomas, the publisher of Communicate magazine, said: "The innovation has disappeared since AOL took over. When the innovation stops, top people tend to leave."

Analysts believe Bebo could find a buyer, but at only a fraction of its original cost. A similar fate befell Friends Reunited, for which ITV paid £175m in December 2005 but sold last year for just £25m.

Mr Thomas added: "Three years ago, we were dazzled by numbers of users. We now have a better understanding of the value of social networks. Those that have added innovation and accessed a range of different audiences have done well."

Social gaming: Zynga's a winner

Zynga, the social gaming company behind Facebook games such as Mafia Wars and Farmville would be worth $5bn if it was traded publicly today, research suggests. The group's shares currently trade at $9 on the illiquid private market, but would be worth 75 per cent more if Zynga went public, according to a study by former Goldman Sachs and Sanford Bernstein analysts for SecondShares.com. They said that online social gaming was "huge, growing rapidly and highly profitable". Zynga currently has a pool of 237 million monthly players, and 50 per cent of monthly active users of the top 10 game developers on Facebook. From revenue estimates of $300m last year, the analysts expect Zynga to hit $1bn by 2012.