Is China Facebook's next step?

Updated: 2012-05-17 10:49

By Ariel Tung in New York (China Daily)

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Is China Facebook's next step?
Facebook Inc. CEO Mark Zuckerberg is seen on a screen televised from their headquarters in Menlo Park moments after their IPO launch in New York May 18, 2012. Facebook Inc. began trading on the Nasdaq market on Friday, with its initial public offering at $38 a share, giving the world's No. 1 online social network a $104 billion valuation in the third largest offering in US history. [Photo/Agencies] 

Friday brought the biggest initial public offering of an Internet company when 421 million shares of Facebook Inc began trading on Nasdaq in a move expected to raise as much as $16 billion.

While Facebook faces concerns about the durability of its business model, which relies heavily on advertising, some analysts believe the social networking behemoth will seek to enter China, where its services are not yet available, to grow revenue.

Is China Facebook's next step?
An investor holds a pamphlet during a Facebook Inc IPO Meeting in Boston, Massachusetts on May 8. [Eisen / Bloomberg]

In its original prospectus filed with the US Securities and Exchange Commission in February, China was mentioned nine times, clearly indicating "the country is under serious consideration as a new market for the social network", said Jon Russell, Asia editor of NextWeb, a technology site.

"It's very likely that Facebook's goal is to expand very rapidly. It is looking at China because it's the only field left open for them," said Jeffrey Barlow, director of the Berglund Center for Internet Studies at Pacific University in Oregon.

During a weeklong "roadshow" before the IPO, some investors raised concerns to Facebook management about the company's business model and growth prospects. Ad sales make up 83 percent of total revenue for the world's most popular social networking site, according to eMarketer, a firm that researches digital marketing and media.

General Motors Co plans to stop advertising on Facebook after determining the ads have little impact on car buyers' decisions, The Wall Street Journal reported this week.

In its IPO filing with regulators, Facebook acknowledged that growth in users logging on from mobile devices may affect its ad business. The site currently does not display ads via its mobile products.

Even with ad revenue projected to increase by more than 60 percent this year, to $5.06 billion worldwide, eMarketer projects that this side of Facebook's business will dip significantly in 2013 and 2014.

The sustainability of Facebook's approach is being scrutinized. After eight years online, the site boasts 900 million users worldwide but the company generated only $1.21 on average from each of them in this year's first quarter, Barlow pointed out.Facebook's first-quarter revenue increased 45 percent to $1.06 billion compared with a year ago but declined 6 percent from the fourth quarter of 2011. Net income for the first quarter dropped 12 percent, to $205 million, from $233 million in the same period last year.

It is inevitable for Facebook to enter China because the country represents "a great path of growth and new revenue" for the Menlo Park, California, company, said Debbie Williamson, a social-media analyst at eMarketer.

A business model so heavily dependent on ad income might not work in China. Williamson said the primary revenue sources for China's existing social networks are payments from users who play games and access premium areas of those sites, not advertising.

It is also unclear how Facebook would fare in China given the country's already-competitive market for social media. "China's Facebook-like sites, such as Renren, are actually under pressure themselves as Sina Weibo's micro-blogging site is more popular," NextWeb's Russell said.

Sina Weibo, the leading Chinese micro-blogging service and sometimes described as the "Twitter of China", is actually more like Facebook than Twitter, Sam Flemming, founder of China-focused social media analytics firm CIC, told eMarketer.

If Facebook enters China, it would have to compete with Sina Weibo and Tencent Weibo (each with more than 250 million registered members) as well as Renren, Kaixin001 and other networks.

Facebook may or may not be willing to adopt self-censorship in the way Sina Weibo has, but one possibility could before the US company to launch a separate site for China. This could be adapted to suit the unique needs of the country and its laws. But Russell said it is unclear what Facebook would offer that would be unique to Chinese users.

In Barlow's view, a partnership with a local player could simplify things and help Facebook overcome language or culture barriers.

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