Facebook looks east

Successfully entering Asian markets will be tricky

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When teenagers run out of real friends, they go online. When social networking sites run out of new members, they go overseas. Neither strategy is necessarily rewarding.

Facebook, looking to China, Japan, South Korea and Russia for growth, needs to do something. Its 500m membership base includes more than one-third of all Americans; the targeted countries, representing one-quarter of the world population, are bigger and less penetrated. Consultancy Business Insights estimates Asian users will more than double by 2015, by which time they will exceed those everywhere else. Yet these are tricky markets which can even wrong-foot local players. A Japanese social networking site, Mixi, valued at $2bn the day it listed four years ago, is now worth less than $700m and profits are shrinking. Since socialising online is as culturally-specific as the physical variety – games trump chat in China and only Japan would have an app for creating digital underwear – that bodes ill for foreign entrants.

China’s Tencent, which provides portal and chatting services and has in its time commanded hyperbolic valuations, should give Facebook pause for thought. Its US-listed shares have fallen nearly 20 per cent in the past three weeks on the back of regulation (a ban on virtual currency for the underage, who comprise one-fifth of China’s online gamers); market slowdown and rising competition.

Cultural differences play out in revenue models, with less advertising and more game-related fees: on a sequential basis, Tencent’s ad revenues fell sharply in the first quarter. Competition is mushrooming across the continent. Mixi has ceded its crown to a trio of newcomers who understand the importance of games, chatter and virtual living.

Just as the ranks of commuters surfing their mobile phones are multiplying, so too are returns from the likes of Gree – more than 100 per cent in the past year. In crowded and uncertain terrain, Facebook needs to think carefully before confirming these are the friends it wants.

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