Facebook in China? Not So Fast

There's much speculation that the social networking site will follow MySpace to the mainland, most likely through an acquisition, but Facebook denies the latest rumors

by Bruce Einhorn

Bloomberg

Over the past few months, investors have speculated about how Facebook would gain a foothold in China. Ever since the U.S. social networking company's rival, News Corp.'s (NWS) MySpace, launched a Chinese version in April, people have been asking when and how Facebook would follow.

Would the company start from scratch, like MySpace China, or would it acquire one of the dozens of Chinese Facebook wannabes? And if Facebook did make an acquisition, which company would the lucky target of its attention? Rumors have circulated about potential candidates such as Xiaonei, a social networking service owned by Beijing-based Oak Pacific Interactive, or Tianwang, another Chinese Web 2.0 site.

On Nov. 19, Facebook quickly nixed the latest rumor. Late in the evening, CNet News reported on its Web site that a Facebook spokesperson had denied a British media report that the company was talking with Zhanzuo.com, one of the more prominent social networking sites in China, about an $85 million acquisition.

Backing from Mighty Microsoft

There's good reason for all the buzz. Microsoft's (MSFT) $240 million investment in Facebook on Oct. 24 confirmed the social networking company's status as one of the hottest Internet companies. Meanwhile, China is the world's fastest-growing Internet market. There are over 160 million Chinese online, making the country the second-largest online population after the U.S.

And with Internet penetration rate now surpassing 10% of the Chinese population for the first time, the pace of growth is likely to accelerate, says analyst Richard Ji, an executive director in Hong Kong with Morgan Stanley (MS). Experience in other markets shows that after passing the 10% mark, "traffic growth tends to be exponential rather than linear," says Ji. "It's leap and jump." That sort of growing online population means that "online community leaders such as MySpace and Facebook may have a chance to grow very swiftly in China if they can localize their services successfully."

Still, the barriers to entry in this business are relatively low and there are already plenty of local rivals offering services similar to those of MySpace and Facebook. BDA, a Beijing research firm, estimates there are over 100 social networking services active in China today. In the late 1990s, there was a time lag between a dot-com idea catching on in the U.S. and then making its way to China, but that's no longer the case. Social networking companies "are a dime-a-dozen nowadays," says Gary Wang, founder and chief executive of Tudou.com, a Shanghai video-sharing service similar to Google's (GOOG) YouTube. "It's hard to see anyone breaking out."

A Leading Role for Murdoch's Wife

For American companies interested in user-generated content in China, however, social networking is a lot more appealing than the video-sharing business. Companies like Wang's Tudou have to contend with much higher infrastructure costs than their social-networking counterparts; Tudou has added 3,000 servers in the past six months and now has 3,500. And since Beijing has long kept television off limits to foreign investment, it's highly unlikely that the government would look kindly on a U.S. company operating a video-sharing service. "Video-sharing from a regulatory standpoint is more sensitive compared to social networking," says Victor Koo, founder and CEO of Youku.com, a Beijing rival of Tudou.