AOL will buy Bebo, a social networking site popular in the UK, for £425m.
AOL, which is owned by Time Warner, said it sees opportunities to make money from advertising on Bebo, which has about 40 million unique users worldwide.
AOL is the latest of the major online players to grab a piece of the social networking pie. Microsoft is working with Facebook to deliver advertisements, and media giant News Corp owns MySpace, the widest-used social networking site.
The acquisition comes as AOL has undertaken steps to revamp its business model from being an ISP to a media and content company. It has been speculated AOL would be sold by Time Warner, and the company has struggled to reinvent itself.
AOL said it will integrate its online advertising technology, called Platform A, with Bebo. Platform A cobbles together innovations from several other AOL acquisitions, including Tacoda and Third Screen Media, intended to fill out its ability to deliver web-based and mobile ads.
In the US, Bebo ranks third behind MySpace and Facebook, but is first in New Zealand and Ireland and is widely used in the UK, AOL said.
Bebo, a closely-held company, does not make public its revenue figures, which makes it difficult to gauge its financial success.
AOL chairman and CEO Randy Falco defended the acquisition price. "In terms of Bebo, we think it's an excellent asset at a great price. We have a proven track record of spotting value," he said during a conference call.
Time Warner executives were "incredibly" supportive when AOL asked to go ahead with the deal, Falco said.
Social-networking sites such as Facebook and MySpace have been valued quite highly due to their wide user bases and potential for marketing and advertising. But the sites, which are free to join, are unproven money makers.
Bebo has looked to other ways to make money other than display advertisements. Bebo ran an online serial drama - 'Kate Modern' - and sold product placement slots to businesses. It has also let retailers such as Nike create themed marketing pages, which has proven to be a less intrusive way to attract interest from users.
One of the large looming questions is how social-networking sites will increase their revenue from advertising without frustrating users, who can always leave.
Facebook ran into trouble last year after a new advertising programme, Beacon, caused a privacy outcry after users complained that it was too intrusive and stealthy in tracking their actions outside of the social-networking site. Facebook modified it twice to address the privacy concerns, some of which nonetheless persist.
AOL's chief operating officer Ron Grant said the company plans to "supercharge" the monetisation of the site. But Falco said AOL will be very careful about making changes that could reduce its user base.
Joanna Shields, Bebo's international president, said users only see one ad per page now. AOL plans to integrate its AIM and ICQ instant messaging applications into Bebo, Falco said.