Why Facebook Refuses To Enter The Chinese Market

| About: Facebook (FB)

Last week, when asked a question about the company's zero percent market share in China, Facebook's (NASDAQ:FB) North Asia director, Jayne Leung responded by saying that the company didn't have any plans of changing this anytime soon. China presents a lot of growth potential for Facebook; however the Chinese government is likely to interfere with the content of the website if it were open to accepting members from the country. China is known for heavy censorship and Facebook seems to be intimidated by that for the time being.

Besides, while the company is having trouble monetizing its members in North America and Europe, it would make little sense to enter into the Chinese market where monetizing members will be much more difficult and much less profitable. Currently, access to Facebook's website is blocked by the Chinese government and the company will have to make many changes to its content in order to comply with some of the rules set by the Chinese authorities. When the company was applying for its IPO earlier this year, it reported that it wasn't able to come up with a way of satisfying the Chinese authorities while keeping the company's principles intact. Currently, China has a population nearing 1.5 billion with a third of the population being regular internet users.

This is from the company's S-1 filing:

China is a large potential market for Facebook, but users are generally restricted from accessing Facebook from China. We do not know if we will be able to find an approach to managing content and information that will be acceptable to us and to the Chinese government.

Websites like Renren and Sina Weibo and Qzone have already claimed much of the market share Facebook would have gained if it found a way to comply with the Chinese government. At this point, Facebook would be entering in a market that's already partly saturated by other companies who acted faster. Of course, Facebook could steal market share from them just like it did in the US with MySpace, however this is not guaranteed. Facebook will probably not worry about moving to China until it can determine a way to monetize American and European users effectively, especially in the mobile space, where screens are much smaller and it is much more difficult to insert advertisements of any kind.

Of the 955 million users on Facebook, 155 million happen to be located in countries in the Asia-Pacific region. The member base in this area has the largest potential for growth and the smallest potential for monetizing for Facebook. The website's user growth rate has hit an all time low this year with the absence of Chinese users. About a year ago, the company's CEO Mark Zuckerberg also said that the company wasn't interested in entering the Chinese market anytime soon. Keep in mind that he also said that the company didn't plan on having an IPO either though. It looks to me like Facebook's management makes decisions by using the one day at a time approach rather than thinking long term.

On an unrelated note, last week Mark Cuban wrote about all the finger-pointing regarding the plunge in Facebook's share price in this blog. Mr. Cuban's point of view is interesting and one I totally agree with. He said:

I bought and sold FB shares as a TRADE, not an investment. I lost money. When the stock didn't bounce as I thought/hoped it would, I realized I was wrong and got out. It wasn't the fault of the FB CFO that I lost money. It was my fault. I know that no one sells me shares of stock because they expect the price of the stock to go up. So someone saw me coming and they sold me the stock. That is the way the stock market works. When you sit at the trading terminal you look for the sucker. When you don't see one, it's you. In this case it was me.

I couldn't agree more. As investors, we are responsible for doing our research and determining which company to buy and which company not to buy. A company might look "cool" and trendy on the surface but it might be a terrible investment due to the fundamentals. Many of Facebook's investors completely ignored the fundamentals and bought the company based on the "cool" factor.

In order to stop the constant bleeding, Mark Zuckerberg promised the investors of the company that he would hold on to all of his Facebook shares for at least a year. In the following months, more than 1 billion shares will be unlocked, and dumping such a large number of shares in the market in a short period of time would have a devastating effect on the company's value. It is nice that Mr. Zuckerberg promised to hold on to his shares; however, I still find it funny that he added "at least a year" to his promise. If I was founder and CEO of a public company, I would hold onto my shares of the company for at least 5-10 years unless I believed that the company had no future. Maybe Mr. Zuckerberg is as clueless as I am about Facebook's future beyond a year.

On October 29, Facebook employees will be able to dump 234 million shares in the market. On November 14, 1.09 billion more shares will be added to the list. At the moment, it is impossible to tell how many of these shares will actually get dumped in the market; however, holding shares through these two dates can be very risky for the investors. If enough insiders hold on to their shares during this period, it might be bullish for the company in the short term. For example, Marc Andreessen and Donald Graham promised not to sell their shares for purposes other than paying taxes in the short term.

In addition, a number of analysts covering the stock admitted that they didn't understand the business model of the company. The company is blamed for being quiet about its future plans, and it doesn't share much information with the shareholders of the company about how the company is doing. It looks like the members of the upper management still believe that they own the company. If the company doesn't want to lose many investors, it should act more like a public company.

Eventually Facebook will find its bottom and become a "buy" but I have no idea when that will be. It may be in a year, in five years or in 10 years. I just know that the company won't find its bottom anytime soon because a lot of things are wrong with the company. Then again, I wouldn't short it either, because the Wall Street has the habit of pumping certain stocks up for no reason. If this company enters in the radar of "stock pumpers" in the same way Amazon (NASDAQ:AMZN) did, it might burn a lot of shorts. I would simply stay away from this highly volatile and speculative company for the time being.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.