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Next Facebook May Be Chinese as Sites Innovate, Not Copy

March 29, 2013

Next Facebook May Be Chinese as Sites Innovate, Not Copy

Customers look at iPad tablets in the Apple Inc. store in Wangfujing shopping district in Beijing. China added 51 million Internet users last year, bringing its total to 564 million. Photographer: Feng Li/Getty Images

Instagram, the photo-sharing app bought by Facebook Inc. (FB) last year, offers special effects that can give pictures a weathered black-and-white cast or retro tints. In Beijing, Xu Chaojun’s PaPa app does that, too. In addition, it lets users attach voice messages that can sound like robots or cats.

PaPa notched 10 million downloads in five months from iPhone and Android users and the company released an English-language version, Wave, on Apple Inc. (AAP)’s iTunes on March 10.

Chinese Internet companies, such as Alibaba.com Ltd. (1688), have been dismissed as imitators of successful U.S. enterprises like EBay Inc (EBAY) (EBAY). Some have been content to profit from their vast home market. Yet Xu’s firm and others aim to compete globally and many Chinese entrepreneurs are improving on the Western products that inspired them, said Kai-Fu Lee, the former head of Google Inc. (GOOG:US)’s China operation and founder of venture capital fund Innovation Works.

“Innovation, if it’s defined as inventing the light bulb, might still be a stretch for China,” said Lee, who helped fund PaPa. “To be the first to conceive of the next iPhone may be still a little difficult, but the prospect of making a Facebook, a Twitter or an Instagram, I think that is now, for the first time ever, within reach for the Chinese startup.”

Success Stories

The companies Lee says are closest to that kind of success -- two years away, he predicts -- aren’t exactly startups. He points to WeChat, an instant-message app with 300 million users that’s owned by Tencent Holdings Ltd. (700) (700), and Weibo, a Twitter-like microblog with more than 500 million registered accounts, run by Sina Corp. (SINA) Tencent is China’s largest Internet company by market value, and Sina is listed on the Nasdaq.

China’s early Internet companies like Alibaba learned “a lot” from western companies like EBay, Lee said. Alibaba didn’t simply copy any foreign model and came up with its own solutions like payment escrow services to address a lack of consumer credit cards in China, said John Spelich, an Alibaba spokesman.

Innovation Works, founded in September 2009, manages $500 million in assets, including funding from YouTube co-founder Steve Chen and Foxconn Technology Group. The fund is based in the Zhongguancun district of northwestern Beijing, China’s equivalent of Silicon Valley. So far, Lee’s invested in roughly 50 companies, with a goal of five success stories a year.

While Instagram is available in the country, through app stores including China Mobile Ltd (941).’s Mobile Market, Facebook isn’t. The Menlo Park, California-based social network, along with Twitter and Google Inc (GOOG).’s YouTube, are censored and blocked from local users.

Instagram hasn’t caught on in China because it was missing a key ingredient for local tastes, which was voice, said PaPa’s Xu.

‘Crowded Environment’

“Chinese people like to use their voices,” Xu said. “You go to a Chinese restaurant and it’s very noisy. You go to an American restaurant and it’s very quiet. We live in a crowded environment so we are used to noise. We like noise.”

Intel Corp (INTC).’s venture fund, Intel Capital, has invested about $670 million in more than 100 Chinese technology companies since 1998. Richard Hsu, managing director of Intel Capital China, said many of the roughly 40 companies in his portfolio have had to develop new business models to succeed.

Shanghai-based Uucun, which helps set up and run app stores for more than 300 smartphone makers, gives away its products, making money from ads and promotions embedded in the apps. The ads reach 30 million users and the company has attracted more than $10 million in investment from firms including Intel Capital and Vickers Capital, Uucun Chief Executive Officer Zhang Zhendong said.

Financing Access

China added 51 million Internet users last year, bringing its total to 564 million. In a speech on March 4, President Xi Jinping urged “boosting innovation-powered development in order to make China an economic heavyweight.” Yet censorship by the government hampers entrepreneurs and keeps China from taking “its rightful place in terms of innovation,” said Duncan Clark, chairman of BDA China, a technology consulting company.

Another problem: reduced access to financing abroad. The number of Chinese initial public offerings in the U.S. last year declined to three, less than one-tenth the peak in 2010, as allegations of accounting fraud weakened investor demand.

Still, China has become “a fast-paced entrepreneurial launchpad,” Clark said.

PaPa’s Xu, 33, said he and Li Xiaobao, 24, finished the first version of their photo- and audio-sharer a month after conception. Xu estimated that PaPa will hit 50 million users this year and 200 million within three years. That would outpace Instagram, which reached 100 million users in February, almost two and a half years after its introduction.

PaPa, a 30-employee company based in a reclaimed Mao-era factory, has raised more than $10 million from firms including Innovation Works and Sequoia Capital. It’s already sold its first paid advertisements and Xu said it’ll do even better once he hires a sales team.

Yet he’s resisting urges to attempt an IPO.

“PaPa now is only at the start of our ambition,” he said.

To contact the reporter on this story: Edmond Lococo in Beijing at elococo@bloomberg.net

To contact the editor responsible for this story: Jeff Muskus at jmuskus@bloomberg.net


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