A Chinese Perspective on Facebook’s Future

One month before its momentous IPO, Facebook’s prospects seem murky. This week, the company announced that it has 900 million users and cooling revenues. Last week, Facebook purchased Instagram, a year-old photo sharing app for USD 1 billion. Fear of competition seems to be the main impetus behind the acquisition: Facebook does not need Instagram’s user base (they are all on Facebook anyway), it does not need Instagram’s (lack of) business model, and it does not need Instagram’s (unremarkable) technology. Meanwhile, pundits compare Facebook with competitors like Apple and Google as they grapple with the company’s USD 100 billion valuation. We do not know if Facebook is worth that much, but the Chinese market may offer a few clues. China is pertinent to the discussion as a case study in market dynamics and as a source of potential Facebook competitors.

But first let’s take another look at the US. In 2005, Yahoo! purchased Flickr for USD 35 million. At the time, Yahoo was a leading search, mail, and content provider, and Flickr was the poster child of the Web 2.0 era — pioneering and popularizing features such as tagging, groups, “favoriting”, and socializing based on aesthetic affinity or geographic proximity. Since then, Flickr has mostly moved sideways and Yahoo made a few great leaps backwards.

Facebook was founded around the same time. Like Flickr, Facebook essentially offered users the ability to share, tag, and comment on photos. Unlike Flickr and Yahoo!, Facebook did not try to become a quality content provider. Instead, it appealed directly to users’ vanity and self-indulgence; it took the idea of user generated content and turned it into a platform for a variety of (mostly inane) social interactions. In acquiring Instagram, an application that allows users to shoot and share quasi-artistic photos, Facebook is complimenting its existing appeal to vanity with a new appeal to pretentiousness. Catering to the desires of the age is a good strategy, but some might do it better than Facebook.

Which brings us back to China, the only country with internet companies that are both large enough and brazen enough to beat Facebook in the race for the lowest common denominator. Tencent QQ, China’s most popular instant messaging platform, has more than 700 million users. A little over a year ago – about the same time Instagram was launched – Tencent launched Weixin, a mobile messaging app that allows users to share photos and sound bites. Weixin now has more than 100 million users, two or three times more than Instagram. Weixin became popular by complimenting the appeal to vanity and pretentiousness with a new appeal to licentiousness: The app’s key feature, the “look around” button, allows users to check out and chat up nearby users, including complete strangers. Last week, Tencent launched a new version of Weixin with a new English name, WeChat, indicating the company’s growing interest in overseas markets.

Unlike international niche apps like Grindr and Blendr, Chinese find-and-flirt apps are mass market products that integrate seamlessly with everything else their users do online. The latest version of Weixin allows users to create elaborate personal profiles, define social circles, and publish whole galleries; it is integrated with other popular social platforms including Weibo, Renren, QQ, and now even Facebook. Ironically, China’s strict control over online communication is gradually turning it into a social media powerhouse: The country’s local apps grow without interference from foreign competitors (Facebook, Twitter are blocked here), and Chinese users do more online thanks, in part, to local regulations that make it easier to trust the identity of people and organizations they interact with.

If China’s social media giants will try to expand overseas by acquiring foreign platforms, they might face political resistance or WTO censure for not allowing foreign media companies to operate freely in the Chinese market. Alternatively, they can grow organically and gradually attract foreign users, as Weixin-WeChat is now starting to do. Soon enough, Facebook’s biggest problem will not be the fact that its web site is blocked in China, but the fact that its Chinese competitors are not blocked in the US. Either way, anyone trying to come up with a reasonable valuation for Facebook should not leave China out of the equation.