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AOL Goes Solo Without Dynamic Social Network Plan

A newly emancipated AOL could undercut its big bet on original online content without a more enterprising, integrated social media strategy to connect with users.

Failing to develop a more dynamic approach to social networking -- the fastest growing Internet sector -- seems peculiar for AOL CEO Tim Armstrong. The savvy former Google executive is riveted on fortifying AOL's general and niche content as well as premium advertising for target users.

In preparation for AOL to begin publicly trading this week after being jettisoned by Time Warner, Armstrong has not discusseded a social media strategy with investors or the press. He has said little about plans for Bebo, a social network AOL acquired for $850 million in 2008. Earlier this year, Armstrong denied speculation about plans to sell Bebo.

AOL's home page provides an interface with existing social networks including Bebo and the user creation of Facebook-like pages around its AIM instant messaging service. There is limited social network interface with AOL's original niche content, 80 percent of which it produces. This could become a more critical factor as competition intensifies across connected personal mobile devices.

"Audiences are becoming more fragmented and legacy portals are losing share to niche sites and mass market social networks" such as fast-growing Twitter and Facebook, said RBC Capital Markets analyst Ross Sandler. "AOL and Yahoo face similar structural problems" in that they are not participating in growth areas such as social media, which is stunting their user growth, Sandler said.

AOL's ability to command premium ad prices depends on how well it generates sufficient scale, reach and page views with distinctive niche content on its branded online verticals, said Barclays Capital analyst Douglas Anmuth. Such special interest sections include Lemondrop for young women, Engadget for technophiles and PoliticsDaily for politicos.

Social networking contributes to heightened consumer engagement and relevance through friend recommendations and virtual sharing. It can help to accelerate the growth AOL needs. Anmuth forecasts a 13 percent decline in both AOL revenues and earnings in 2010, and says he expects declines to continue through 2014.

AOL stories and blogs generally emulate online newspaper and magazine text that is pushed out to consumers in a one-way stream. AOL's AIM instant message and other communications services lacka strong core community and a more fluid, spontaneous Twitter-like stream.

Its recently announced plans for what has been dubbed "a robo content strategy" -- allowing advertisers to dictate and create content designed to attract specific target consumers - is not about social sharing. It is already a lightning rod for controversy over concerns that its new algorithmic system renders manufactured news.

During UBS' annual media conference in New York this week, Armstrong said AIM and AOL's other communications businesses need "some cleaning up," but did not elaborate. That could include the improved integration of Bebo.

"We're building the world's largest niche media business," Armstrong told CNBC earlier this week. "You're looking at a very high scale, high ROI, return-on-capital business."

Ultimately, it is difficult to imagine how AOL cab achieve that by leveraging its dominant position in finance, travel information, music and entertainment, as well as its MapQuest location service, without a more vibrant social link with its users.

While an eventual acquisition by or partnership with the likes of Yahoo, Microsoft or even InterActiveCorp remains possible, even that would do little to provide AOL with a more proactive social presence.

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