- We recently launched coverage of Renren Inc. with an estimate of $3.17. Renren’s social network offers similar services as Facebook.
- Renren and other social networks fill the void left by the ban on accessing Facebook in China
- The return of Facebook to China can dilute Renren’s advantage over competition and people are expected to migrate to Facebook in such a scenario.
We recently launched coverage on Renren Inc. (RENN) with a $3.17 price estimate for the company’s shares. Renren operates a Facebook (FB)-like social network in China called renren.com with an activate user base of 178 million. It generates majority of its revenues through advertising on its websites, online games and its group buying service, Nuomi. Advertising and online games are particularly heavily dependent upon the social network.
Renren’s position in the Chinese social network market is helped by the Chinese government restricting access to Facebook within China. The reason behind the censorship is Facebook’s refusal to toe the government’s line on regulating user generated content. On the other hand, Renren has supported the government as and when required. Renren is a real name social network i.e. users are required to register with their real names on the website. This helps the Chinese government to track content, prevent protests against its policies and is line with the recently announced law for real name registration.  Here we take a look at Facebook’s history in China and how Renren is benefiting from the ban on Facebook.
Facebook first made a move to enter the Chinese market in 2008. It did so by offering users surfing Facebook through Chinese IP addresses a Chinese language version of the site with simplified Chinese characters of the type used in mainland China. The users could also access the Chinese site through zh-cn.facebook.com. The launch was unannounced unlike other international versions. The company had about 285,000 members in its “China” network within a week of the launch.   The users in China could see localized advertisements (most of them in English). However the site did not have any noticeable China-specialized content or functionality.
In July 2009, about a year after the launch, the Chinese government blocked access to social networking sites such as Facebook and Twitter after riots broke out in the western region of Xinjiang.  The popular belief was that the Xinjiang independence activists, the alleged perpetrators of the riots, were using Facebook as a tool to communicate and organize protests. The initial ban was followed by the decision to bar the entire country from accessing Facebook.
Facebook Says No Plans To Enter China In The Near Term
Recently, Facebook has reiterated that it does not plan to enter China in the near future. Since the ban, Facebook has grown to over a billion users worldwide. Its unwillingness to co-operate with the Chinese Internet censors has resulted in homegrown options like Renren and Sina Weibo filling the void. However, the company has not ruled out China as a potential option in the future. The decision will depend heavily upon both Facebook and the Chinese government agreeing on an acceptable approach to managing content and information. 
How The Absence Of Facebook Benefits Renren?
a. Social Network And Advertising Business
Most of Renren’s advertising revenues are generated from display ads when users access their accounts on its social network. The user interface of Renren’s social network is very similar to that of Facebook’s. The company denies being a Facebook clone, though it has some features similar to those of the latter.  Also, the web page layouts have matched that of Facebook’s over time.  Renren has thus benefited by offering services similar to Facebook’s while letting users connect with a significantly smaller network. Renren.com currently has about 178 million activate users in comparison to Facebook’s over 1 billion. Despite offering similar services, Renren has faced trouble monetizing its expanding user base through advertising.
Renren, like Facebook, also offers an open platform for developers to launch their services on its social network. However, the number of applications and developers on Facebook are substantially more than that of Renren’s. The lower number of applications restricts user engagement on Renren which limits its advertising potential. Better targeting and growth in user engagement can result in advertising revenues to Renren’s net revenues growing over time.
We believe that Facebook returning to China could result in a significant decline in Renren’s user base. The users may be lured away by a wider selection of applications and a larger international network. This can have a negative impact on the company’s advertising revenues.
b. The Online Gaming Business
Last year was a transformative one for Renren. The growth in advertising revenues was trumped by the growth in revenues from online games. The trend was supported by Renren being the developer of games available on its social network. In contrast, Facebook depends on third party developers’ use of its open platform for applications such as games. Hence, while Facebook gets about 30% share in revenue generated from applications, Renren, being a game developer, gathers almost all of it. 
Renren faces competition from the growing presence of Zynga (ZNGA) and other game developers in China. Zynga formed a joint venture with Tencent Holding’s (OTCPK:TCEHY) Pengyou service in mid-2011, giving it access to Tencent’s approximate 400 million users.  The results from 2012 suggest that Renren has been able to successfully address the challenge provided by Zynga’s China operations. Revenues from online games have grown in the 25-40% range sequentially.
We believe that the format of Renren’s social network (similar to Facebook) and its popular massively multi-player online role-playing games (MMORPGs) will help online game revenues grow at similar growth rates in the near term. However, the return of Facebook and games from other developers along with it can result in a significant negative impact on Renren’s online games revenues.
We have a $3.17 Trefis price estimate for Renren’s stock, which is 15% above the current market price.
- China Real-Name Registration Is Now Law In Country, The Huffington Post, December 2012
- Facebook’s China Foray, ChinaRealTime, June 2008
- Facebook Gets Poked in China, ChinaRealTimeReport, July 2008
- China Blocks Access To Facebook, Twitter After Riots, Washington Post, July 2009
- No big surprises, Facebook is still not planning to enter China, exec confirms, The Next Web, September 2012
- China’s Renren social network copies Facebook Timeline, InsideFacebook, September 2012
- Renren Vs. Facebook, Echouser, May 2011
- Facebook launches app centre to promote third-party software, BBC U.K., June 2012
- Zynga Partners With Tencent to Offer Chinese Version of ‘CityVille’ Game, Bloomberg, July 2011
Disclosure: No positions