Part 1: Why Facebook Would Have Won If China Were a Free Market (Kai Lukoff)
Part 2: Why Facebook Would Have Failed Even if China Were a Free Market (Alvin Graylin, CEO of mInfo Inc.)

Note: Facebook launched its Chinese-language version on June 23, 2008. Shortly afterwards, it was periodically blocked following the Tibetan riots in Western China. Facebook (and Twitter) were completely blocked in China on July 9, 2009, following the ethnic riots in Xinjiang province.

Virtually all big foreign internet firms have failed in China (Facebook, Twitter, YouTube, eBay, etc.) None have had great success. Is this failure attributable to a lack of understanding of local user preferences or government censorship and protectionism?

I think the answer varies from case-to-case, hence a specific counterfactual: would Facebook have won if China were a free market? That is, free of censorship requirements and severe regulatory intervention (e.g., refusal of a virtual goods license or a redirect of traffic a la Google to Baidu).

I believe Facebook would have won, due to the fractured local Chinese landscape, a superior 3rd party ecosystem, and eight international case studies.

China’s Fractured Social Networking Market

China’s social networking market is still an open competition, though I believe the field has now narrowed from four down to two competitors: Oak Pacific Interactive’s RenRen and Tencent’s Qzone. That China had a nasty dogfight instead of a dominant, pre-existing player in the space (like CyWorld in South Korea), indicates that Facebook had an opening. Facebook has overcome clones and competitors all around the world (current stats), including MySpace (US and beyond), StudiVZ (Germany), Hi5 (South America), Friendster (Southeast Asia), Wretch (Taiwan), and Orkut (India and soon perhaps Brazil).

RenRen started as Xiaonei, a complete clone of Facebook, which “blatantly copied some of Facebook’s software code and even initially included at the bottom of each page ‘A Mark Zuckerberg Production Production’” (The Facebook Effect p. 171). RenRen today largely remains a copy of Facebook, though it’s added a handful of ‘localization’ features (footprints, emoticons, etc.) and pricy brand advertising. It’s quick to copy the latest changes from Facebook–RenRen now has Connect, Like, and Places, and Groups are coming soon.

It lends support to Facebook that the leading real-relationship social network in China is a copy of Facebook, not a more localized service like CyWorld in South Korea or Mixi, Gree and DeNA in Japan. It now claims 160 million registered users and 30+ million daily active users.

RenRen intends to IPO in 2011. I don’t know any revenue numbers, but given the buzz surrounding Chinese internet IPOs, my guess is that RenRen will be valued at over a billion USD. I think it’s fair to say that if Facebook could have achieved RenRen’s status in China, it would’ve been a major win.

Tencent’s Qzone is further afield from Facebook. Qzone started as a blogging platform and relies heavily upon nicknames rather than real-life identities, which has been a formula for failure for many social networks against Facebook (see MySpace, Wretch, etc.). Tencent has attempted social networking for real friends (QQ Campus, XiaoYou) and failed, giving RenRen all the breathing space that it needed. Tencent has suffered from embarrassingly poor execution, despite the awesome resources its disposal for building a Facebook-style social network. Its third attempt at real-life social networking, QQ Pengyou, just launched last month.

Tencent’s reliance upon its traditional user base in 2nd and 3rd tier cities may actually inhibit the spread of its real-relationship social networks, which follow a model of ‘elite spread.’ It’s no coincidence that Facebook started at Harvard; it’s doubtful that the site would have had the same success coming from an average university in the U.S. like Chico State. RenRen copied the same strategy in China, spreading from Tsinghua to other elite universities first.

But Tencent is the 800-pound gorilla on the Chinese internet (even 1st-tier city, white-collar users all use one of the 636 million active QQ Messenger accounts), so Qzone (or another Tencent attempt like Pengyou) could still become China’s dominant social network.

Still, the biggest threat to ‘Facebook in China’ (and other social networks), may be a different model altogether: a microblog with social network characteristics, Sina Weibo.

Chinese Developers Love Facebook

An extremely strong asset for Facebook would have been its superior 3rd party ecosystem, in particular applications by local Chinese developers. China has a prolific developer community that’s currently getting screwed by Chinese social networks, which are either completely closed (Kaixin001, Qzone is semi-closed) or offer very low revenue share (RenRen and 51.com). As a result, most Chinese developers are forced to go overseas.

Facebook is a far better partner for developers than any of the Chinese networks. Its revenue share is 70% for the developer; for a long time it was 100%. Hong Kong and Taiwan have hordes of popular Chinese-language Facebook applications.

RenRen is open, but produces in-house copies of popular games (e.g., promoting RenRen Farm over Happy Farm by a 3rd party), to the dismay of developers. When Playfish refused to accept its terms, RenRen subsequently produced an identical copy of Playfish’s Restaurant City game (RenRen Restaurant) that has done well. Last I read, the maximum revenue share on RenRen is 56%.

Tencent is notorious for ripping off 3rd parties. The joke among Chinese developers is that for every dollar the developers you get ‘Ten Cent’–if you’re lucky. After the fight with 360 Anti-Virus (a debacle for Tencent), CEO Ma Huateng has pledged to ‘open up’. “This (the dispute with Qihoo 360) has taught us a good lesson and led to self-examination in my company,” Ma said. We’ll see.

By comparison, these networks make Facebook look like a saint. Moreover, Facebook China would have the added draw of high-quality games from advanced international developers like Zynga, Playfish, and Playdom, which China’s platforms all lack. Chinese users are ardent adopters of social games (which fueled the rise of Kaixin001), so a strong community of local and international developers would have been a formidable asset for Facebook.

Eight International Case Studies

There are eight case studies that shed light on how Facebook may have fared in China (interactive map of Facebook statistics). Facebook has won in the first first four cases: Hong Kong, Taiwan, Indonesia, and India. It appears to be on its way in a fifth case: Brazil. The final three cases (plus China) are the only major markets in which Facebook is far behind: South Korea, Japan, and Russia.

1) Hong Kong
Facebook is not just successful in Hong Kong, it’s wildly successful, with over 50% penetration of the total population (3.6 of 7 million), apparently the highest rate in the world. Hong Kong and Taiwan were selected as cases because of their cultural relation to mainland China and as a strong bet for the international influencers that would spread Facebook into mainland China. If a mainland site like RenRen or Qzone were the winner in those markets (as is the case with some mainland sites in Hong Kong, like YouKu and Tudou), it would question Facebook’s ability to compete.

2) Taiwan
Facebook faced a local competitor, wretch.cc, which it has since surpassed. Wretch started as a blogging and photo-sharing platform and then transitioned to a social network, akin to Qzone in China. One key to Facebook’s win was the spread of the Happy Farm game game, which Wretch could not match. Government agencies, schools, corporations and military resorted to banning Facebook during work time.

3) Indonesia
Facebook overtook Friendster at the end of 2009, becoming the leader in the world’s 4th most populous nation. Mobile usage was a driving factor. Beyond translation, Facebook offered minimal (if any) localization to my knowledge. In addition to Indonesia, Facebook has also conquered other major Southeast Asian markets: Thailand, Malaysia, Singapore, and the Philippines. Friendster went into decline and later found a buyer.

4) India
Facebook overcame Orkut’s lead in users in July 2010, before even opening its office in India. Factors in Facebok’s win include a tool to import your friends from Orkut, a “Lite” version, and translation into several Indian languages (Hindi, Punjabi, Bengali, Telugu, Tamil and Malayalam). There’s no chance in hell that China’s competitive social networks would ever allow such an ‘import friends’ feature, but Facebook’s success in the world’s 2nd most populous nation should not be overlooked.

5) Brazil
Facebook is still far behind Google’s Orkut in Brazil, but signs indicate that it’s rapidly catching up (from 1.5m to 9m users in one year). Brazil exhibits the typical social divisions and ‘elite spread’ that catalyze Facebook’s growth.

6) South Korea
CyWorld, which launched in 1999, has long been the dominant player in South Korea. It had nearly reached market saturation before Facebook even launched in the US. South Korea’s CyWorld is a unique situation–I don’t know of any other nation that had a dominant real-relationship social network long before Facebook. CyWorld’s longstanding dominance has made it difficult for Facebook, though it’s now growing fast. But South Korea’s situation is a far cry from China’s open and ongoing social network war.

7) Japan
There’s fierce competition in Japan between three social networks, Gree, DeNA, and Mixi, each with 20-25 million users. Japan has a unique trait: extremely high mobile usage (market leader Gree is 99% mobile). In addition, Japan’s social networks were already online with their own visions in February 2004, just before Facebook. By contrast, RenRen (Xiaonei) didn’t soft launch until October 2005, at which point it was a direct clone.

8.) Russia
Russia’s case is perhaps the strongest counterpoint to my argument. VKontakte, the market leader, started late (September 2006) as one of many Facebook clones. Still, there are unique factors that explain Facebook’s failure. One Russian social media blogger writes, “thousands of pirated copies of domestic and foreign movies translated into Russian… this is the most significant advantage of Vkontakte over Facebook.” If this were RenRen or Qzone’s formula for success (it’s not), that’s obviously not a tactic Facebook could compete on.

South Korea, Japan, Russia, and China are also the four major markets that Facebook is targeting for growth (though how it intends to overcome its block in China anytime soon is beyond me). The Financial Times writes:

When interactions between users within a country outnumber those across borders, Mr Zuckerberg said, “we know a country has tipped”. “We are very close to that in a lot of these places,” he said of his Asian targets. Russia has just passed 1m users, and is doubling membership every six months, while Japan and Korea also have 1m users.

Five months after Zuckerberg’s comments, South Korea and Russia are seeing explosive growth, although they’re starting from a small user base relative to their domestic competitors (CyWorld and VKontakte).

A Facebook World, Without China

These global case studies reveal a universal demand for Mark Zuckerberg’s core focus: social networking based on real-life relationships. The question therefore is not would the model have worked in China, but “who would have executed it best?”

On a level playing field in China, that’s Facebook. Chinese’s fractured social network landscape, Facebook’s superior 3rd party ecosystem, and eight international case studies make the case. It’s distinctly possible that in 2 years the entire world will be connected on Facebook, without China.

  • NnamdiJr

    This is the most comprehensive write-up of Facebook’s would be chances in China. Great article, looking forward to part 2!

  • Dominic Penaloza

    Good article, Kai. Convincing article. The fact that Renren Xiaonei was so similar to Facebook is a very interesting case study against the conventional wisdom that localization is a key factor. Facebook’s success in Hong Kong and Taiwan support this argument. Next question: why has there been no significant traction for Linkedin or any of the Linkedin-like local attempts (aside from the current new attempt by Ushi.cn, of course)?

    • http://www.kailukoff.com Kai Lukoff

      Thanks Dominic. An article on LinkedIn and China’s business social networks is in the works; just have to find the time!

  • Hannes

    Good article.

    However I still find that discussions on globalization and diversity are sorely lacking from the discussion of the Chinese social media scene although this is a very defining development at the moment as seems to be suggested by various analysts:

    http://comscore.com/Press_Events/Press_Releases/2010/8/Indonesia_Brazil_and_Venezuela_Lead_Global_Surge_in_Twitter_Usage/(language)/eng-US

    http://www.checkfacebook.com/

    Personally I have FB “friends” from all over the world and I follow Twitter users with different religious, cultural or political backgrounds than me. By contrast it seems to me that the Chinese social web is a very much a members-only club, by Chinese for Chinese and on Chinese.

    Are the Chinese SNS users only interested in participating in a China-only context? I don’t think so. China is part of an increasinly interconnected world and it’s netizens will want to become part of it too. At least I sincerely hope they will, China and the rest of the world would benefit from it.

    Even from a more business oriented viewpoint the long term situation looks precarious. Leaders, companies and organisations around the world including China are realizing the value of diversity for innovation and creativity. I wonder how the Chinese networks can achieve long-term sustainable innovation lacking such diversity in it’s user base or in it’s in-house and 3rd party developer communities.

    One thing is clear and that is that when the Chinese netizens join their peers overseas it will not be through the current Chinese social media companies. If China’s policy on censorship changes soon perhaps FB will have a chance of making a dent into China, otherwise I guess the next big thing engaging the netizens on a truly global basis will be something we have not seen yet. I hope we don’t have to wait too long though.

    Just my two cents, sorry if it was a bit rambling!

    • http://www.kailukoff.com Kai Lukoff

      Agreed, this touches on the broader question of ‘will China’s internet become isolated from the rest of the world?’ I think Facebook is an amazing case of the internet connecting the world. Like you, I regularly interact with friends from all over the world, German, Indian, Indonesian, Chinese (with VPNs), etc. on Facebook and I’d personally be sad to have so many more Chinese friends left out.

  • http://twitter.com/DonSunny46664 Sunny Ye

    Facebook is a geeky creation, but the platforms in China are more of pirates creations, geek vs. pirates, they are in for a real fight.

  • Rhys

    Great analysis, I really like the observations on India, Taiwan and Hong Kong.

    “It’s no coincidence that Facebook started at Harvard; it’s doubtful that the site would have had the same success coming from an average university in the U.S. like Chico State. RenRen copied the same strategy in China, spreading from Tsinghua to other elite universities first.”

    To this point you may add the very significant amounts of mainland Chinese students who study overseas as a factor in “elite spread” – with students overseas getting hooked on FB and inviting their mainland friends to join too (if the playing field was level).

    Although in terms of overall numbers of Chinese netizens this may be a small group, I would suggest they punch above their weight in terms of social influence.

  • http://pangbianr.com joshfeola

    great article, Kai. i’ve read a lot of coverage recently of Facebook’s “China strategy” but none as thorough and informative as this.

    however it seems every article deals in hypotheticals or relies on data that are either outdated (ie from previous years when FB was almost exponentially smaller) or not applicable here (FB isn’t permanently and universally blocked in any other country, to my knowledge). are there any thoughts to how this situation MIGHT change, how Facebook can realistically enter China and clear the GFW?

    presumably this has to be worked out on a bureaucratic level before any discussion of how the product itself will fare in China can occur.

  • Edwardkkchan

    Great article Kai, very thorough analysis!

  • Fons Tuinstra

    Just a suggestion for another analysis: what would be the yield of the Gobi desert if it would rain there every day?

  • http://www.postlinearity.com gregorylent

    i predict a job for you with facebook in asia :-)

  • Myemailwise

    As a Chinese, I love to see a world without China, cause it is too evil. Better get rid of it.

    • yuwenz

      Are you Chinese? Please do not shame the word “Chinese”. You do NOT deserve it!

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    I’m glad Facebook is banned if they were going to try and ‘localize’ it.

    I’m happy with it just the way it is!!

    I don’t agree with point 10 though…no brand awareness in China. Yeah, and? I remember years ago when someone told me about Facebook and I had no clue what it was. Every company has to start somewhere, and word of mouth in China is pretty strong!