By Benjamin Joffe
Facebook's IPO story is a lot about mobile, international growth and Asia.
I am not Asian by birth but have been living there for a dozen years and researching key Asian markets since before Facebook (NASDAQ:FB) was created. Here are my views on Facebook's prospects.
From Facebook's S-1 filing:
In countries such as Japan, Russia, and South Korea we estimate that we have penetration rates of less than 15%; and in China, where Facebook access is restricted, we have near 0% penetration.
While that sounds like a lot of room for growth, let's look at the reality of it.
First, There is no Asia
With its variety of languages, religions, GDP, population sizes, web and mobile infrastructures, regulations and incumbent players, 'Asia' as a word is little but the remain of a Western concept. The only realistic way to look at Asia is by looking at countries on by one.
Why China first? It is the elephant in the room and still growing fast.
Facebook has been blocked there for years, and there is simply no way around the local definition of what constitutes objectionable content. Any web or mobile company who does not self-censor faces shut down if it local, and blocking if not.
While I've heard local entrepreneurs say it is not worse than dealing with Sarbanes-Oxley, the enforcement is roughly equivalent to how other governments might deal with terrorists, drug dealers, pedophiles, and organized crime (the "four horsemen of Internet apocalypse"), or how mass media deals with touchy topics that could upset the powers that be, or their advertisers. For foreign companies that offer content - published either by themselves or by users - it is a pretty big headache, compounded by the double set of constraints they have to deal with: those at home and those in China.
The PR headaches are - as Google (NASDAQ:GOOG) experienced - pretty solid. And the question is: is it worth the effort? Assuming content is managed, China is not a walk in the park anyway: it is easily the most competitive market on the planet, simply because there are so many entrepreneurs and so much venture money. Social networks? China already has TWO listed on the stock market: Tencent (OTCPK:TCEHY) (worth $53.4 billion) and RenRen (NYSE:RENN) (listed in May 2011 on the NYSE and today valued at $2.43 billion).
While RenRen called itself "the Facebook of China" and even went IPO a year before its Western cousin, it has a number of key differences with Facebook. Looking at revenue, RenRen is far from being Facebook: they made only $118 million last year, half of it from ads, the other from games. However, setting aside the sale of their stake in the travel portal eLong for $50.9 million, the year would have ended with a net loss.
RenRen is overall a very opportunistic company experienced at executing on proven concepts and raising capital. They even launched one of the numerous Groupon (NASDAQ:GRPN) adaptations and spent tens of millions operating and promoting it, with limited results so far. Third-party developers hardly make money with RenRen, which even develops and operates its own games.
Meanwhile, at Tencent
Tencent is an entirely different game: $4.5 billion in revenue in 2011 (that's 20% more than Facebook at $3.7 billion), $1.6 billion in net profit (62% more than Facebook's nice and round $1 billion). Tencent operates TWO social networks (or three if you count their IM service QQ as another one).
Tencent counted 576.7 million active users on Qzone, 214.5 million on Pengyou and 751.9 million on their IM QQ. It also runs the largest microblog service in China with 425 million registered user accounts and 67 million daily active accounts, but we won't talk about it as it brings no significant revenue.
The majority of Tencent's revenue is derived from online games, web games, social games and avatars ('Internet value-added services'); a mere 7% comes from advertising. Their revenue split is thus vastly different from Facebook's. Which also means that Facebook's model is unlikely to deliver good results immediately - and this is provided they can launch and acquire users in China!
After some initial resistance due to Facebook's design ("as long as it's square and blue!") and real-name policy, Facebook has been growing well in Japan. The movie "The Social Network" definitely helped get more visibility and make it more mass market. But Facebook's users there stand at less than 10 million.
The benefits of addressing the Japanese market, whose population is less than half the one of the US (128 million people), are:
(1) A high GDP/capita
(2) Very good IT infrastructure (actually, far better than the US, according to Akamai).
Being the second largest online advertising market in the world, it makes sense for Facebook to go after it, and Facebook opened an office there some time ago.
Japan also has this interesting fact that it sports two mobile gaming platforms-cum-social-networks GREE and Mobage, by the company DeNA. Those two are on track to over 2 billion dollars each in revenue in 2011 from the Japanese market, with about 25 million registered users each. (GREE's sales were $795 million in the year to June 2011, while DeNA's were $1.8 billion - GREE's sales were $575 million and DeNA's were $526 million in 1Q2012), with healthy profits.
Of course, this did not happen overnight, but it means two things:
(1) There is lots of money spent on mobile social games in Japan
(2) Facebook could potentially make money there, and in other markets, by learning a thing or two from Japan.
According to Akamai (NASDAQ:AKAM), South Korea has the world's fastest Internet. You could even argue it had its very own Facebook 10 years ago when Cyworld was launched and pioneered the micro-transaction model on its social network.
Unfortunately, had Facebook been born 10 years ago in Korea, it would not have been able to raise enough capital or grow internationally until the glorious moment of its IPO.
While Cyworld dominated Korea for a decade, Facebook finally started to register more page views than its local rival sometime last year. Cyworld has been around since 1999 but lost most of its youthful startup spirit after it was acquired by SK Communications in 2003 (for a whopping USD$ 7.14 million- that was all before MySpace boomed and "social network" was even a term).
Is there revenue in other Asian markets?
Here I can share some first-hand experience from a company I helped co-found named Cmune, the Beijing-based makers of UberStrike, Facebook's largest first-person shooter. You read that correctly: a cutting-edge free-to-play multiplayer 3-D shooter inside Facebook. Made in China, where Facebook is blocked. Oh, the irony.
UberStrike's user base is global (China excepted) and our number 1 market is the US. You might wonder: why not launch in China first? Well, the revenue share offered by local social networks Tencent and RenRen and the market size for social games were not so motivating. RenRen offers on average 50%, and the revenue (as seen above) is not great, while Tencent used to offer 90/10, unfortunately the 10% was for developers. We now hear it's a 70/30 split (30% for you), though your mileage may vary. Overall, about a dozen social game companies make real money in China, with over 10 million MAU, but the revenue per user is generally 1/5th to 1/10th of a US user, so better grow in the US first.
China aside, and after disappointing results on Cyworld (Korean social platforms do not have their social gaming act together quite yet), we got a few surprises in Asia, which I will try to explain.
UberStrike registered many users from the Philippines and Indonesia. Unfortunately, most seem to be kids in Internet cafes and not eager to spend $20 on powerful guns, so they mostly play for free. Maybe when the country will reach over $5,000 GDP/Capita there will be a real market there.
On the contrary, Singapore and Malaysian players, while much less numerous, monetize really well. Singapore is easy to explain: English-speaking, wealthy, with great IT infrastructure and lots of credit cards. So despite its rather small population (5 million), it brings valuable revenue.
How about Malaysia? Though not often on the "developed countries" list, Malaysia is no third world either: over 28 million people, though Malay dominates in this Muslim country, most educated people speak fluent English regardless of ethnicity. It has a decent GDP/capita, largely concentrated among ethnic Chinese who represent 20% of the population.
When I asked Ganesh Kumar Bangah, CEO of the e-payment company MOL, who bought Friendster (yes, Friendster is Malaysian now) before selling back its SNS patents to Facebook for a hefty sum and partnering with them for Facebook Credits distribution (they also own 3.5 million shares of Facebook), 70% of the revenue they collect is from those 20% of ethnic Chinese - still a solid 5 to 6 million people, a similar size to Singapore.
Other Asian markets? I have yet to see social gaming or mobile companies making hundreds of millions in Thailand, Vietnam or other emerging markets. Even India - depending where you place your "Asian" frontier - has poor infrastructure, low GDP/capita, numerous languages and poor payment systems, which make it unattractive for app developers to localize fully.
Sure, Indonesia is the fourth largest Facebook country with 42 million users (behind US, Brazil and India), but most of them are on mobile (with feature phones) and pay nothing.
So How Big is the Potential?
China is going to be an uphill battle if it ever happens.
Japan might eventually bring in good revenue, but it's competitive, especially on mobile.
Korea can turn into a decent market and competition is weak on the web, but users are not the next billion.
Other countries might bring users, but revenue will take years to come, if no local competitor emerges like in China or Russia.
As for mobile, the spread of Android ($100 and soon $50 mobiles, not the $500+ iPhone) is going to help gather many across "emerging Asia." Money-making will only start when Facebook has something to sell on mobile, integrated with proper payment platforms. Even then, let's keep it real: it is not going to be raining gold because of the hard barrier of GDP/capita.
Note: Benjamin Joffe (@benjaminjoffe) is the CEO of the Asia-based digital research & strategy firm +8* (Plus Eight Star), a speaker in 100+ conferences including TEDx, SXSW, LeWeb and Stanford GSB. He is also a founding partner of Cmune (@cmune), the Beijing-based makers of Facebook's largest first-person shooter UberStrike (@uberstrike), who just announced its first funding from Atomico.