Facebook in China? Not So Fast

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That's why most of the speculation about user-generated content has centered on MySpace and Facebook. Among the big American Web 2.0 companies, MySpace has tried most aggressively to enter the Chinese market. It launched its Chinese service in April after months of buzz, with Rupert Murdoch's Chinese-born wife Wendi Deng Murdoch taking a leading role in the rollout. MySpace China got off to a slow start, though, and it has yet to set the market on fire (BusinessWeek.com, 6/26/07).

Local rivals certainly don't seem intimidated by MySpace or Facebook. "They are too late for this market," crows Joe Chen, chairman and CEO of Oak Pacific Interactive, the company that owns Xiaonei, a Zhanzuo rival that is one of the most popular social-networking services for China's 20 million college students. "People don't want to go to a brand new network." Chen says that Xiaonei has 70% of the market and is now opening up its network to high school students and white-collar workers in order to find new areas for growth.

Friendster's Offshore Approach

Rather than slug it out in China, Friendster, a rival to MySpace and Facebook, has tried a different approach. It has not set up an operation in China, but it does now offer Chinese-language services from its U.S.-based servers (with both the traditional Chinese characters used in Hong Kong and Taiwan as well as the simplified characters used in the mainland). While combining the Chinese-language service with the main U.S.-based one makes it difficult for Friendster to sell advertising targeted at Chinese users, it allows the company to begin focusing on its China strategy more gradually.

Given the many problems that American Internet companies such as Yahoo! (YHOO), eBay (EBAY), and even Google have had trying to penetrate the Chinese market, that take-it-slow strategy makes sense, argues David Wolf, president of Beijing media consultancy Wolf Group Asia. "A lot of companies are starting to learn the lessons of their predecessors," he says. Rather than jumping into the Chinese market with a big splash, "they are quietly making their core services more and more comfortable for Chinese people to use."

Still, in order to make money off of those Chinese users, companies need to be in China. "If they want to target China for revenue, they need a license and need to get advertising targeted at Chinese users," says Duncan Clark, managing director of BDA. "Ultimately, companies want to have the ability to collect local advertising revenue."

Einhorn is Asia regional editor in BusinessWeek's Hong Kong bureau .