Do Foreign Social Networking Sites Have a Future in China?

I recently saw a quote in a Forbes article that caught my attention. Rebecca MacKinnon, a media studies professor at the University of Hong Kong said, “I don’t think any foreign Internet company can effectively compete against Chinese companies in the Chinese market. The regulatory environment is so difficult that it’s almost impossible for foreigners to have an advantage over locals who have better political connections and who can manipulate the regulatory system much more effectively."

If this is true, then it’s bad news for foreign social networking services such as Facebook and Myspace because China is a huge market. I got the data from CNNIC, in June 30, 2009, the number of Chinese Internet users was 338 million, up 13.4% from late 2008. And this number will only rise in the coming years. Despite this massive opportunity, no western social networking sites (SNS) have made substantial inroads into the Chinese market. China’s top 5 SNSs are all Chinese local companies, such as QQ alumni (50%), Renren (37%), Sina Space (36.6%), 51.com (27.1%), and Kaixin001 (26.4%). Facebook doesn’t even rank among the top 15 SNSs in China, and MySpace has just 6 million users. Meanwhile, QZone, one of China’s leading SNSs, recently announced group revenues of over $1 billion.

Why do foreign SNSs have such difficulties making gains in China? According to Professor Alan Hshieh, human-computer interaction expert from Harvard University and host of the Facebook Developers' event, the failures of Facebook fall under three key points: Platform Functionality, Dissimilar Internet Interaction and Cultural Differences. First of all, the market is dominated by local enterprises. Instead of using Facebook, Chinese users prefer their own local social networks because they already have what they want. Secondly, Chinese social networks operate quite differently from those in the U.S., where users are allowed to freely share all kinds of data without the threat of censorship. In China, Internet companies are responsible for whatever content is posted on their servers, but foreign Internet companies do not have experience using real-time filtering technologies to identify and remove politically sensitive keywords and content, and have difficulty keeping up-to-date on the topics the Chinese government considers sensitive. Thirdly, partial Chinese SNSs have already opened up payment APIs, whereas Facebook does not offer developers access to its payment system. Finally, Chinese sites are proficient at imitation. They quickly take the best ideas from foreign companies and make their own versions—this applies as much to SNSs and all other Web 2.0 and eCommerce services as it did to the app market.

Despite this overwhelming list of obstacles, the outlook for foreign SNSs is not completely negative. An article from Global Times argues that not all American Internet companies have failed in the Chinese market. The authors, Mr. Sherman So and Mr. Christopher Westland, indicate that Google and eBay both do good business in spite of being overshadowed by their Chinese counterparts. Despite Baidu and Taobao’s larger market share, small business enterprises frequently turn to Google and eBay for overseas sales because of their greater reliability. Also, the online game World of Warcraft has been a remarkable success with millions of customers in China. By partnering with local operators, World of Warcraft has managed to turn healthy profits. What’s more, by investing $1 billion to buy 40 percent of the Alibaba group in 2005, Yahoo turned around its track record in China and made $5 billion in 2009.

Though Mr. So and Mr. Westland offer some strong examples of foreign Internet companies who have succeeded in China, I personally feel these companies are more the exception than the rule. The cards are stacked against foreign companies trying to work in the Chinese regulatory environment, and it is extremely difficult for them to overcome the legal constraints of the Chinese government and the pressure and know how from local competitors. Beyond these barriers to entry, which are already quite daunting, I believe the biggest problem now is simply one of network economies. When the Chinese Internet market was first taking off, Facebook and Myspace may have had a chance to sweep in new users. But now that services such as QQ and Renren have already established such large user bases, it will be very difficult for Facebook to persuade new users to sign up—new users will always choose to go where the action is and where all their friends have already signed up.

The penetration rate for the Chinese Internet market is only about 26 percent, compared to 75 percent in the US and 74 percent in Japan, as Mr. So and Mr. Westland reported. I think there is still a long ways for the Chinese Internet market to grow, and still many opportunities to turn a profit. But foreign companies are so far behind now that I believe that partnership with local Chinese Internet companies is the only way for foreign SNSs to thrive in China. Foreign SNSs still have a lot of experience over their Chinese counterparts and can offer their international brand recognition to the mix. More importantly, as China grows more internationalized, Chinese users will want to connect with their foreign friends, and this is where Facebook, with its 300 plus million users, will have a huge advantage. Perhaps through partnership and profile-sharing with a Chinese service, Facebook will be able to position itself as the bridge between China and the world. And it might even turn a profit.

Sources:
1. Tina Wang: Cracking China's Social Network Market (2008)
http://www.forbes.com/2008/08/21/china-social-networks-tech-ebiz-cx_tw_0821china.html

2. CNNIC (China Internet Network Information Center) Survey Report (2009)
http://www.cnnic.net.cn/en/index/index.htm

3. Sherman So and J. Christopher Westland: Foreign entrepreneurs in the China Internet industry (2009)
http://business.globaltimes.cn/industries/2009-08/458231.html


Wei Chen, Allie