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3 February 2012 By Wei Gu

Befriending China’s 500 million Internet users sounds like a must if Facebook is to justify its hefty valuation. The world’s largest social network is seeking up to 27 times its 2011 revenue in an initial public offering in New York. But the China-shaped hole in its business model might not be worth filling. Google and Groupon have shown it’s hard to succeed inside the Great Firewall.

If Facebook captured as many users as China’s leading networking company Tencent, it would enlarge its existing user base by 60 percent. Founder Mark Zuckerberg, who has been learning Chinese, has examined a possible joint venture with a Chinese partner like Baidu or Alibaba, according to people familiar with the matter. Yet Beijing, which has banned the social network, may not even be comfortable with it in a joint venture form.

Setting up some kind of parallel China site is no real solution. The necessary self-censorship could bring reputational and legal trouble for Facebook outside China, even aside from the technical challenge of monitoring discussions among its close to a billion users. And a walled off network doesn’t really gel with Facebook’s goal of connecting the world’s 2 billion Internet users.

Facebook would be challenged in China anyway. Social network users have quite distinct local tastes, which puts global brands at a disadvantage. The market is over-crowded too. Google had less than a third of Baidu’s market share in China before it exited the market in 2010 amid claims of hacking attacks and a dispute over censorship. Groupon’s China joint venture closed more than half of its offices in 2011, besieged by 6,000 group buying rival websites in China.

Even China’s rapid growth rates might disappoint financially. Chinese advertising is mostly done offline. Renren, the closest thing to Facebook in China, generates less than half of its revenues from advertising, versus more than 80 percent at Facebook. A Renren user is worth about one tenth of a Facebook user to advertisers, based on their advertising and user figures. For now, Facebook isn’t missing much by missing out on China.


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