Facebook: The China challenge

A few weeks back Mark Zuckerburg was spotted in Beijing, strutting through the headquarters of Baidu – China’s dominant search engine and resident Google killer. A couple of days later similar photos popped up after a visit to Sina.com, the Nasdaq-listed online content and social networking powerhouse.

The tech press and the blogosphere went crazy, predicting Facebook’s imminent arrival in the Chinese market and just how this may work given the Chinese government’s iron grip on social networking and communication technology.

Facebook may have a massive war chest, recently topped up with a US$500 million investment round led by Goldman Sachs, and a proven product and business model in other parts of the world, but its success in this complicated market is far from a foregone conclusion. China is littered with the graves of successful ‘Western’ technology companies but given how much of their future growth is likely to come from developing markets, it’s difficult to believe Facebook can avoid making some type of Chinese play for much longer.

Come join the joyride

Like pretty much every other corner of the technology world right now there are two overwhelming trends in the Chinese tech industry: Mobile and social. China has one fifth of the world’s population, many of whom are in the process of leap-frogging the PC revolution and having their first experience of the internet on a mobile phone. On paper at least this makes it a perfect prospect for Western tech companies and investors looking take advantage of these two uber-trends.

For any tech business looking to tap the local advertising market in the future (as Facebook is clearly doing with its expanding Places feature set) China holds an additional set of charms with its growing consumer market (Goldman Sachs estimates Chinese retail sales currently at US$1.8 trillion a year, will reach US$5-6 trillion by 2020) and its expanding number of high population density urban centres (McKinsey & Co expects China to have 221 cities with more than one million inhabitants by 2025 – there are only 35 in Europe today).

But building a successful social-mobile application requires a keen local sensitivity and the ability to adapt fast to an intensively competitive market. While it looks like Facebook may be going about things the right way by partnering up with a local company like Baidu, China could still prove to be Facebook’s biggest test to date.

The Great Firewall of China

Facebook’s first challenge will be the Great Firewall of China and the Chinese censors. Like the majority of high profile foreign social networking and blogging services, Facebook is currently blocked in China.

The Chinese government keeps firm control over social networking services and, to continue to operate in China once your site or app has gained any popularity will require a license from the government’s media licensing department. Licenses are only granted to Chinese-based companies and are notoriously hard to come by.

Once you have a license you will need to put systems in place to censor objectionable content and remove this from the service within seconds of it having been posted. Failing to do this can result in your services being banned. The authorities have even been know to shut whole data centers if they are concerned about objectionable content.

A good relationship with the Chinese government, and willingness to play by their rules, is also vital to have any chance of mainstream success. Google is a prime example of this, having resisted censorship requirements in their its results and engaged in a very public spat with the Chinese government.

Even once you have got all the basics in place and are operating locally the government can still alter its policy – just ask Skype who are rumoured to be facing a looming Chinese ban designed to protect the state run telecoms companies from competition.

The necessity of good government relations; difficulties getting a license; Facebook’s lack of a Chinese subsidiary and the intricacies of dealing with a potentially crippling amount of content requiring censorship could all point to why Facebook could be looking to partner up with a Chinese ‘competitor’ with established government connections as a means of gaining access to the market.

The rise of the smartphone

The casual observer on a busy Shanghai shopping street could be forgiven for thinking that the smartphone, and in particular the iPhone 4, dominates the mobile web and application landscape in China. In reality whilst this market is growing fast (200% year on year according to Morgan Keegan) apps and smartphones are still just a blip on the mobile radar in China.

Here Nokia and Java-based phones still dominate and while many Chinese now have access to internet services on their mobile devices, its mainly via their wap browser rather than a smartphone (or niche application) that users consume mobile services.

Like many established internet services Kaixin001.com and RenRen.com are two Facebook clones and major players in the social networking scene in China that are investing heavily in their WAP and mobile businesses. Facebook will find these two competitors worthy adversaries in both the new mobile markets as well as the traditional online social networking space.

Finding the mobile money

While Facebook doesn’t currently focus its monetisation efforts on mobile, invariably this will play a major revenue driver in the future.

Monetising mobile in China is challenging. The app store does not dominate here like elsewhere, with iPhone and Android devices still enjoying limited market share and Nokia having only launched their China Ovi Store in March 2010.

When apps are downloaded they often tend to be directly from a publisher or brand website or via a forum or mobile advertisement.

For developers this means finding alternative means to monetise their applications post-download. Games and virtual goods are big money spinners but micropayments for content, in particular mobile newspapers and magazines, are also popular.

Hey, you look familiar

China is renowned for its ability to imitate and the tech sector is no exception. Facebook, like many other Western tech companies will face very familiar looking competition, with the aforementioned RenRen and Kaixin having implemented similar user interfaces and feature sets to the Californian blue giant when they launched in China. Since then both have thrived and evolved in Facebook’s absence, making them significant forces in the industry.

There are still opportunities however. Both RenRen and Kaixing001 have evolved to become more focused on the services built on their networks (gaming in particular is very popular) and have disregarded simpler (but fundamentally important) core social features allowing users to share experiences, thoughts and content with one another. Traditionally this is an area in which Facebook excels.

Facebook’s Social Graph platform approach and its strategy to become the ‘social glue’ of the internet is also currently unrivalled in China and is a major opportunity.

The Clone Wars

The propensity and freedom to imitate ideas is often a difficult fact of life for Westerners to accept, as they often find themselves competing with a company using technology, which is only a slight variation on their own intellectual property.

Recent history also shows that these local clones are far more likely to win when confronted with the foreign ‘inspiration’. This is most often due to their willingness to adapt and try new things to find success and Western companies propensity to re-use products and business models that have worked in other parts of the world.

Good examples of this are TaoBao, the online consumer marketplace, which beat eBay by realising that Chinese sellers would be unwilling to share their sales revenue, and the aforementioned Baidu who mimicked Google but ensured their search solution was adapted to the tastes and culture of Chinese users.

Many Chinese people feel that Western Tech companies’ fatal flaw is arrogance — a belief that they already know what’s best for the Chinese consumer without first spending time understanding the unique culture and political situation. Facebook will need to learn from others’ mistakes and ensure that their services are highly tuned to the Chinese consumer if it is to avoid a similar fate. Relying on their existing generic global service and expecting the successes they have had in other markets is unlikely to work in China.

Facebook’s recent US$50 billion valuation makes it worth as much as the global supermarket giant Tesco (on paper at least) and its brand may carry major weight around the world. But the millions of mobile-wielding, blue-collar Chinese workers are unlikely to have ever heard of Facebook and are probably already using an existing social networking service which offers many of the same features.

With all this in mind, it’s going to be fascinating to see how Mark Zuckerberg and Facebook devise and roll-out their Chinese strategy when the time is right.