AOL and parent Time Warner (TWX) have been in the news quite a bit lately. Time Warner today reported it is spinning off its cable unit and will receive a $9.25B dividend in return.

So the ongoing transformation of the company continues.

With the ebb and flow of Microsoft/Yahoo! deal rumors Time Warner's AOL unit has occasionally popped up as a potential player. With AOL, their transformation has been a public and often-criticized drama that seems to go on without end.

This might be a good time to see what progress AOL has made.

AOL is pursuing a three-pronged strategy. They are working to extend and capitalize on their most popular products, properties and features. They are looking to profit from the long tail. They are committed to creating a formidable ad network. Let's look at each in turn.

Product extension --

AOL has recently closed the purchase of Bebo, the British social network. Bebo has more than 40 million members worldwide. In the United States, however, it ranks a distant third behind MySpace and Facebook.

Here's why this is significant for AOL:

Bebo will form the centerpiece of AOL's newly created People Networks business unit. People Networks will integrate AOL's other community applications and tools, including instant messaging, chat and e-mail into Bebo. Users will be able to merge AIM and Bebo profiles so they can use common screen names without re-registering. In addition, People Networks will integrate other recent AOL acquisitions, including widget technology company Goowy Media and social search question and answer
service Yedda.

Here's why it may not be all it's cracked up to be:

It is becoming common knowledge that it is hard to monetize social networks. The merging of profiles provides at least an improved advertising potential for AOL. The hope is that AOL will be able to monetize this audience in ways that other social networks haven't. Even if they can pull it off, the modest audience size in the U.S. may make it hard for AOL to see the benefits they are seeking.

Despite the caveats, the acquisition does make sense. Bringing Bebo in-house and integrating all of AOL's community tools into it does provide AOL with a more complete social networking platform. With all the kids who are using AIM and ICQ, AOL can make a play at early acquisition. By providing the one-profile approach, it is easy to become a Bebo user as a side activity to using AIM or email.

Profit from the long tail --

AOL has said it will focus on serving niche audiences with the launch of dozens of specialty web sites.

Why this is a good idea:

AOL is attempting to do a better job of attracting advertising revenue to offset its rapidly declining Internet access business.