Feb. 9 (Bloomberg) -- The top social-networking service in the world’s biggest Internet market was created by graduates of a prestigious university to help students communicate with each other. And it’s not Facebook Inc.
Renren.com leads China’s surging social-networking market with more than 160 million registered users, according to Analysys International in Beijing. Competitor Kaixin001.com has more than 93 million. Their edge over billionaire Mark Zuckerberg’s service: a government that blocks Facebook access.
“Our service is basically the same as Facebook’s, in terms of functions and features,” said Donna Li, a general manager at Renren. “We are more tailored to the China market.”
With Facebook’s valuation topping $63 billion, Renren and peers may be the next investment opportunities in a market with more Internet users than the combined populations of the U.S. and Japan. Those sites and competitors Tencent Holdings Ltd. and Baidu Inc. have room to grow as the online advertising market is projected to triple to almost $13 billion by 2014.
“Advertisers have really warmed to the new social- networking sites very quickly,” said Steven Chang, chief executive officer for China at Zenith Optimedia, the media unit of Publicis Groupe SA. “A lot of advertisers are willing to do business with the new social-media sites because many of them actually use the services.”
Renren, or “everyone” in Chinese, is probably preparing for an initial public offering, said Michael Clendenin, managing director at consultants RedTech Advisers in Shanghai. The site’s biggest investor is Japan’s Softbank Corp. Kaixin001.com, founded by former Sina Corp. executive Cheng Binghao, also is seeking a listing, Clendenin said.
Online advertising in China likely totaled $3.9 billion last year and may climb more than 30 percent annually to $12.9 billion by 2014, Susquehanna International Group LLP estimated in December. The portion spent on social networking likely will double to 24 percent that year from 12 percent in 2010, according to the Pennsylvania-based firm.
China’s social-networking sites haven’t competed against international websites since 2009, when the government banned access to Facebook and Twitter Inc. Internet users can circumvent the firewall through means such as AnchorFree Inc.’s virtual private network service that assign an anonymous address traceable back only to the company and not the user. Using VPNs results in slower Internet connections.
Zuck Visits China
Zeng Guojun, a cosmetics salesman in Guangzhou, uses Renren to communicate with his friends in China, and Facebook for international news and information.
“Renren has copied most of Facebook’s features, so they now do almost exactly the same things,” said Zeng, 29.
Zuckerberg, 26, visited Baidu and Sina offices in December, fueling speculation Facebook is seeking increased access in China. Facebook may "potentially" win advertising sales from Chinese companies, Jayne Leung, head of the company’s sales operations in Hong Kong, said in an interview yesterday.
Facebook, which claims more than 500 million users worldwide, is valued at $63.7 billion, according to secondary exchange SharesPost Inc.
Renren’s roots trace back to 2005, when graduates of Tsinghua University in Beijing founded Xiaonei.com, or “inside school.” That was just after Zuckerberg pitched his service to fellow Harvard University students.
In 2006, Xiaonei was acquired by closely held Oak Pacific Interactive Corp., which renamed the service Renren in 2009.
“The name change was a great help for us,” Li said. “Previously, our name spoke of our background in academia. Now we have a wider appeal.”
Advertising on Renren has more than doubled each year since the site started selling space in 2008, Li said.
Renren has a blue-and-white user interface that resembles Facebook and carries advertisements for Daimler AG’s Mercedes- Benz and China Mobile Communications Corp.’s phone service. Renren users post messages via a dialogue box in the center of the page and access games, applications and other options on a menu on the left-hand side.
In 2008, Oak Pacific sold a 35 percent stake to investors including Softbank, the Japanese mobile-phone operator headed by billionaire Masayoshi Son, for $430 million.
Renren aims to increase user numbers through its music, wireless and location-tracking services, Li said. The website also aims to boost sales through Nuomi.com, an online commerce affiliate.
600 Million Users
Kaixin001.com, with a red-and-white interface, attracted users by focusing on browser-based online games, Chang said. Its most popular games include “Happy Farm,” which resembles Zynga Game Network Inc.’s “FarmVille.”
Zhang Shanshan, a public-relations manager for the Beijing- based website, declined to disclose user figures and other operational details.
“Kaixin001.com’s core user base is white-collar workers, which is viewed favorably by advertisers,” said Jim Tang, a telecommunications analyst at Shenyin Wanguo Securities Co. in Shanghai. “Renren.com, because of its background in academia, is used mostly by students.”
The similarities between those sites and Facebook illustrate how networking sites in China are generally modeled after the Palo Alto, California-based company’s service, said Sabrina Dong, an analyst at Analysys International.
Their successes are noted by some of China’s biggest Web companies. Tencent, China’s largest Internet company by value, last year launched the social-networking site Pengyou.com to attract its QQ instant-messaging service users. The company says it had 636 million QQ accounts as of Sept. 30.
Tibet, Nobel Censorship
Pengyou, or “friend,” targets “white-collar” users, a company spokeswoman said in an e-mail.
The site will have trouble luring users from Kaixin and Sina’s Weibo micro-blogging service, said Bill Bishop, an independent media consultant in Beijing.
“Tencent is for the masses,” he said. “A lot of people who use Kaixin, Weibo, don’t want to use a Tencent-sponsored social network.”
Baidu, owner of China’s dominant search engine, said this month it plans to develop more social-networking services.
Government censors monitor the Internet and block access to content deemed unacceptable. Facebook users may join groups supporting Tibet independence and Liu Xiaobo, the jailed Chinese dissident awarded the Nobel Peace Prize last year, yet no such forums are found on Renren or Kaixin.
Renren plans to take advantage of those restrictions on international rivals, Li said.
“We don’t know when Facebook will enter, and what they’ll do, but we are confident,” Li said. “We want to be the dominant player in social networking.”
COMMENTARY: In a previous blog post dated January 23, 2011 titled, "Facebook To Double Advertising Revenues To $4 billion in 2011, But Growth Cannot Come Solely From Advertsing", I was pointed out that Facebook's revenues were $1.860 billion in 2010, and it is projected that they will reach $4.05 billion by 2011 and $5.74 billion by 2012.
According to eMarketer, Facebook's advertising revenues for 2010 represent 7.4% of total U.S. online advertising spending. eMarketer projects that Facebook's advertising revenues for 2011 and 2012 will represent 14.9% and 18.8% respectively.
According to new estimates from SNL Kagan, total US advertising expenditures for the years 2010 through 2012 will be as follows:
- 2010 - $210.5 billion (up 2.8% from 2009).
- 2011 - $214.3 billion in 2011.
- 2012 - $275.8 billion in 2012.
According to eMarketer online advertising as a percentage of total media advertising expenditures as reported by SNL Kagan for the years 2010 through 2012 will be as follows:
- 2010 - 12%.
- 2011 - 12.7%.
- 2012 - 11.1%
I was hoping to determine the advertising revenues for China's social network's, but those numbers are not forthcoming. However, according to eMarketer (see below), worldwide social network advertising revenues are as follows:
- 2010 - $3.48 billion.
- 2011 - $5.97 billion.
- 2012 - $8.09 billion.
According to eMarketer, Facebook's actual advertising revenues for the years 2010 through 2012 are as follows:
- 2010 - $1.86 billion or 53.4% of total projected worldwide SNS advertising revenues.
- 2011 - $4.05 billion or 67.8% of total projected worldwide SNS advertising revenues.
- 2012 - $5.74 billion or 71% of total projected worldwide SNS advertising revenues
If eMarketer estimates are correct, the rest of the world's social networks generated social network advertising revenues as follows:
- 2010 - $1.62 billion or 46.6% of total worldwide SNS ad revenues.
- 2011 - $1.92 billion or 32.2% of total worldwide SNS ad revenues.
- 2012 - $2.35 billion or 29% of total worldwide SNS ad revenues.
China's social networks, ranked #2 behind Facebook in total number of users (see below), will probably command the lions share of the remaining worldwide socil network advertising revenues.
China's online advertising spending for the years 2010 through 2012 (See chart below) and percentage share of total media advertising are as follows:
- 2010 - $3.7 billion or 10% of total media advertising.
- 2011 - $4.6 billion or 12% of total media advertising.
- 2012 - $6.2 billion or 13.5% of total media advertising
China's total media advertising spending for the years 2010 through 2012 (see chart below) are as follows:
- 2010 - $33.64 billion.
- 2011 - $38.33 billion.
- 2012 - $45.93 billion.
As you can see, China's online advertising spending as a percentage of total media advertising spending are comparable to those for the U.S., but obtaining China's social network advertising expenses is a different matter.
According to WhatsOnXiamen.com, China's social network market is very crowded and concentrated at the top by four major players. here were reportedly 100 social network sites in China. As of July 15, 2010, there were a reported 100 social network sites in China and 210 million Chinese were using social network sites.
In a previous blog posted dated January 17, 2011 titled, "A Look Inside China's Social Network Universe, Where Facebook, Twitter and Google Are Banned," I mentioned that the top four social networks are as follows:
- Qzone - 388 million users.
- 51.com - 160 million users.
- RenRen - 130 million users.
- Kaixin001 - 75 million users.
These are raw estimates, and cannot be confirmed. These four represent 753 million users or the bulk of China's social network membership. In the U.S. Facebook has won the "social network wars", and has no competition for social network advertising spending. The situation in China is completely different, since advertising spending is spread between the Top 4 social network sites, and everybody else.
Data from Internet research company Analysys International shows that the number of Chinese social networking site users is expected to reach 510 million and sales revenue will top 979 million yuan or US $150 million in 2011. According to eMarketer, Facebook is supposed generate 4.05 billion in advertising revenues for 2011.
As you can clearly see, China's social network advertising expenditures are considerbly less than Facebook's by a country mobile. China's social networks are still experimenting with advertising.
According to a study titled "Social Factors in User Perceptions and Responses to Advertising in Online Social Networking Communities", appearing in the Fall 2009 issue of The Journal of Interactive Advertising, the rapid growth of online social networking communities has caught the attention of advertisers that hope to capitalize on the potential for advertising on China's social networks. However, the general feeling has been that members will feel exploited if the sites suddenly appear overrun with ads.
China's burgeoning social network industry thus has been under increasing public pressure to strike a balance between the need to generate advertising revenue and members' demand for uninterrupted social experiences A 2008 report by IDC found that 43% of social network users never clicked on ads, a dramatic difference from the 80% of other Internet users who did so at least once a year. Furthermore, 23% of nonusers of online communities who clicked on an ad then made a purchase, whereas only 11% of social network users who clicked on ads did the same (eMarketer 2009).
It can can readily been seen that Chinese perceive advertising as exploitive, venemous and with a negative effect on their online social experience, and it is for these reasons that social network advertising is in a state of flux.
If it was Facebook's hope to capitalize on the growing social network market in China, they should've reconsidered for the following reasons:
- Facebook has a terrible trackrecord with key Asian countries. They haven't made much of a dent in India, South Korea or Japan, where their share of the local social network audience are in the low single digits. They face a similar problem in Russia and Brazil.
- Facebook needs to cross the cultural divide of China (and other Asian nations), developing a social network experience that is superior than that offered by existing social network sites.
- China's social network audience is highly resistant to advertising, and I don't think Facebook would do much better. Currently, there are not a lot of advertising dollars to be had.
I truly believe that even if China opened its doors to Facebook, or Twitter for that matter, I cannot conceive of a situation where they would generate much in the way of advertising revenues. In the U.S., Facebook's CPMs are very high and their clickthroughs are atrocious. They will get even worse results in China.
In conclusin, Facebook's best bet is to acquire one of the leading Chinese social networks, instead of trying to grow their own membership. The problem is adoption. Chinese are vested and pretty loyal to their existing social network site, and getting to switch to another social network site is very difficult. It is actually going to be a lot cheaper for them to acquire members than build their own membership base.
Courtesy of an article dated February 8, 2011 appearing in Bloomberg Businessweek