Facebook Facing Growing Competition From Asia

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When I moved to Asia, I was surprised how many people actually asked me if I'm on Facebook (NASDAQ:FB). The Asian continent actually has the largest number of Facebook users globally with over 272 million users. Couple that with a penetration rate of just more than 6%, the opportunities for growth in Asia for Facebook are quite impressive.

I was equally surprised by how many people in Asia were using several chat apps that I had never heard of. They would "check" Facebook, but they were mainly using one of several chat apps to communicate with their friends.

A major problem holding Facebook back in Asia is the fact that the Chinese government has banned the site. The Chinese government blocked Facebook because Xinjiang independence activists were using Facebook to spread their messages. However, Chinese citizens that want access to Facebook are able to do so through proxy services, which connect users to servers outside the country. The average Chinese Internet user though doesn't know how to access proxy services.

The Rise Of Asian Chat Apps

The new trend in Asia is chat applications. Several have been developed and the fastest growing chat app is Line from Japan. The company reached 100 million users 3 times faster than Facebook. It took Line only 19 months to reach that feat.

What the chat applications offer is the ability to combine a text message with social networking. The apps allow smartphone users to exchange texts, pictures or even YouTube clips and bypass SMS fees charged by carriers.

To understand the potential of the chat applications, one must look at it in this context. More people make phone calls and use SMS than use a social network. A company that can combine phone calls, SMS and a social network will be a very big player.

Line is known for its cartoon characters that users can embed into their chat conversations. The app further allows group messaging and Line offers free voice calls for Android, iPhone, Windows and BlackBerry users. According to NHN, the Line app is the number 1 free download for Apple users. Of the 120 million users of Line, 45 million were in Japan and 15 million each were in Thailand and Taiwan.

Besides Line, we have seen the rise in Asia of KakaoTalk in South Korea and China's WeChat. KakaoTalk has 82 million users and is expanding in Vietnam and Indonesia. WeChat has an estimated 300-400 million users.

Line Focused On Growth And Not Profits

Currently Line is available for free and the company makes money from selling stickers, or cartoon characters. The main focus at Line is driving growth and not on profits. This is similar to how Facebook started in the beginning. As Facebook has looked for profits to appease Wall Street, it has driven many of its users away with the incessant barrage of ads. A competitor like Line that isn't currently focused on profits doesn't bode well for Facebook.

Chinese Competitors

Facebook's 2 main competitors in China are Sina (NASDAQ:SINA) and Tencent (OTCPK:TCEHY). The 2 smaller Facebook competitors are Renren (NYSE:RENN) and Sohu.com (NASDAQ:SOHU).

Sina Weibo is a combination of Twitter and Facebook. Users can post 140-character messages and include images and video. Sina has hundreds of censors and is continually monitoring what is said to comply with Beijing's strict censorship laws.

Tencent is China's biggest Internet company that poses the biggest challenge to Facebook. The company started as an instant messaging service with its QQ service. This service has been in use since 1998 and allows Tencent to attract users for its other services such as Tencent Weibo. Tencent also has a Facebook clone called Qzone.

In 2011 Tencent launched Weixin, which in English is WeChat. Tencent is looking to expand WeChat beyond China and is targeting the US market. WeChat just opened offices in Palo Alto to study the US market. In 2012 Tencent had $7 billion in revenues to Facebook's $5 billion in revenues.

Next Steps For Facebook

Tencent is a formidable competitor that Facebook can't take lightly. For a company to dominate the Chinese Internet market like it has, Facebook has to worry about Tencent expanding outside of China and encroaching on Facebook's stronghold.

In terms of China, many analysts say it is already too late for Facebook to break into the market. Facebook CEO Mark Zuckerberg has said in the past that he wanted to focus on markets that are open to Facebook and not ones that are closed. In some ways I see where he is coming from and in other ways I don't. China is too big of an opportunity to let slip by.

There is tremendous room for growth in Asia for Facebook. The launch of the new Facebook Home on Android will help gain traction in the mobile market. This will hopefully slow the rise of chat applications from Asia. More importantly, Facebook has to become hip again. Many reports say the teen generation is leaving Facebook and favoring the chat applications. Facebook needs to bring them back Home to Facebook.

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.