Why Bebo lost its bounce

He was right. Not only did he meet the woman he was later going to marry during that fateful night out, but Xochi, a visiting student from California, was also going to help him make his millions.

The Birches were the founding couple behind Bebo, the social networking site which at the height of its popularity in 2006, received more hits in the UK than the BBC website.

Set up in 2005, Bebo – short for "blog early blog often" – was one of a string of online ventures created by the technology-obsessed couple. But it was the one that counted.

Within a year it was the talk of playgrounds across the world as teens used it to blog, e-mail and share photos with friends.

Although the social networking phenomenon had already materialised in the form of the more music-focused MySpace, Bebo quickly caught the imagination of the young internet-savvy generation which was keen to share its news and gossip online. Just 12 months after its launch in January 2005, Bebo had attracted 21.4 million users worldwide.

It also caught the attention of some of the world's biggest investors and it wasn't long before the Birches, the trendy young couple whose faces were frequently splashed across technology magazines, were batting away offers for the site they founded with just 8,000.

In 2008 they turned that 8,000 into more than $850 million (556m) when US giant AOL agreed to buy the site. It was the second major acquisition of what some dubbed the "second dot com boom" after Rupert Murdoch parted with $580m for MySpace in 2005.

But while the Birches' new-found fortune catapulted them into the social circles of the rich and famous, it wasn't long before the popularity of their brainchild was tested by another new kid on the block: Facebook.

Although Bebo was now under the ownership of a global technology giant, it soon became clear that, like MySpace, its friends were beginning to desert it.

According to Robin Goad of Hitwise UK, the internet research firm, the turning point came in summer 2007 when Facebook, the invention of Harvard drop-out Mark Zuckerberg, overtook both Bebo and MySpace as the most visited social network in Britain. And despite having the multi-billion pound hand of AOL behind it, Bebo began to lose the battle against its more generic rival, which was winning fans due to its wider appeal.

Technology analysts had long questioned the wisdom of Murdoch's MySpace deal as markets failed to understand the rationale behind paying hundreds of millions for a site which, although popular, had few apparent sources of income beyond advertising. Wall Street and the City were quick to direct the same scepticism in the direction of AOL and Bebo. Just a year after AOL acquired Bebo, the technology world was awash with gossip that the dwindling site was up for sale at a bargain bucket rate.

As if the gossip mongers did not have enough fat to chew on, Jeff Bewkes, chief executive of Time Warner, which spun off AOL in December 2009, publicly admitted that the deal had been overpriced.

So when a strongly-worded missive was leaked from the walls of AOL's start-up acquisition and investment unit on Tuesday night, announcing that "it is currently evaluating strategic alternatives, which could include a sale or shutdown of Bebo in 2010", few other than the site's teenage fans were surprised.

According to figures from market research firm Nielsen, Bebo's active users in Britain, one of its most popular markets, had fallen from 5.8m in 2008 to 1.8m this year.

But before the City's sceptics could cite Bebo as yet another example of the over-hyped social networking boom, rumours drifted from across the Atlantic that Facebook is eyeing an Initial Public Offering (IPO), which could value the company at as much as 65 billion ($100bn). If the IPO does materialise, the flotation would mark one of the biggest technology flotations in recent years. By comparison, Google was valued at 15bn ($23bn) when it listed six years ago.

The contrasting fortunes of the two soon had analysts asking why Facebook was on the crest of a wave while Bebo, once the clear market leader, is at risk of being relegated to the cavernous pit of dot com failures.

According to Gary Ennis, managing director at the web consultancy NSDesign, AOL sat on its hands after acquiring Bebo in 2008. He argues that it did not invest enough in the site to ensure that it stayed at the top of the fast-moving social networking market, which has since spawned a myriad of other trends including "tweeting".

Ennis says: "One of the reasons why they have gone on to fail is because both Bebo and MySpace simply didn't innovate. They thought it would be enough to rely on their member numbers and they stagnated. So a lot of people jumped ship (to Facebook]."

By contrast, says Ennis, Facebook has continued to test new water, introducing a range of applications that have appealed to the mass market.

"One of the very simple but innovative things that they introduced was the status update. It didn't exist before Facebook. Also, the live news feed for your friends. They were the first to innovate with that."

Eden Zoller, an analyst at Ovum agrees. She 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."

When Facebook first emerged in 2004, some analysts described it as "bland" compared to its peers such as MySpace, which struck a chord with trendy young music fans in particular. However, it is precisely this "blandness" that has enabled it to succeed where others have failed, according to Goad of Hitwise.

"Because it was more bland, it became popular across all of the demographic groups," he says. "It's open to application developers and advertisers. It has more of a mass market appeal."

It is this mass market appeal which leads Goad to believe that Facebook can continue to dominate the market and avoid following the fate of many of its competitors. Although question marks remain over how some social networking firms can generate cash from the popularity of their sites, Goad believes Facebook is here to stay.

He says: "Half of people in the UK go on Facebook every day. If you're an advertiser, you could reach as many people through advertising on Facebook as you could on Coronation Street for example. I doubt that Facebook is going to experience the same demise (as Bebo] because it has reached that critical mass. It's a fundamental piece of people's lives now. Social networking and social media is here to stay. There's a generation of internet users who have grown up with it."

Ennis of NSDesign is less convinced. He argues that few of the social networking sites have yet worked out how to make money from their businesses other than through advertising. The weakness of this model, he says, is that as soon as member numbers begin to look as if they are dwindling, advertisers switch their allegiance to the latest up and coming sites.

"All of the social networking sites are in danger of that model," he says. "It takes a lot more than (member] numbers to make these things work."

Sources close to AOL suggested last week that its chief executive Tim Armstrong is swaying towards a closure of Bebo rather than a sale. Although he questions how many social networks can monetise their success, Ennis is, surprisingly, more hopeful than most that Bebo can survive – albeit it on a much smaller scale. He points out that other once-popular sites such as Friends Reunited have continued to exist even though they are past the peak of their popularity. Friends Reunited was last year sold by ITV for 25m to Dundee-based Brightsolid. In 2005, the broadcaster bought the site for 175m.

Ennis concludes: "The whole irony about this is that although AOL considers Bebo to be a bit of a failure, in the UK it's still one of the big players. If you look at some of the online comments about the closure of Bebo, you see there's still a thriving community out there that still wants to use it. You'd think someone might buy it."