Cover Story
Investors click onto Asian social networking sites
Innovative model puts homegrowns ahead of Facebook
Modern social networking is typically associated with online giants Facebook or MySpace. But new media trends in Asia are increasingly driving the innovation and revenue generators in the swiftly evolving sector, making US-created models look outdated.
“The common stereotype is that everything from the US is great, while everything from Asia is weird and sometimes funny,” said Benjamin Joffe, CEO of mobile and internet consultancy Plus8Star in Beijing.
But the reverse can be argued. Joffe pointed out that China, Korea and Japan are leading advancements with “services with high potential that could inspire western markets.”
Innovations flow
Fueled by Asia’s fast take-up of internet and mobile communications and its high proportion of the world’s overall users, innovations are naturally flowing from the region.
South Korea has become the world’s most advanced digital society. Japan, the globe’s second-largest economy, also has status as its leading mobile society. China, meanwhile, has the largest number of mobile and internet users on the earth.
As the shift from traditional media to new media takes hold, a new type of social networking model is emerging in Asia. These innovations are driven not only by the size of the market but also by the region’s greater acceptance of social networking as a valuable communications tool and entertainment medium.
While this new Asian model of social networking is in the early stages of development, one of the distinguishing characteristics of the Asian version is its combination of several forms of communication, Joffe pointed out.
Networking: the new breed
That the new Asian breed offers up not only networking for friendship and business connections but also electronic commerce, mobile commerce, search and gaming – areas that are more advanced in Asia than in the west. Online videos are also part of the mix.
As social media grabs an increasingly larger share of online time, experts predict that social networking sites will become a one-stop destination for many organizational tasks on the internet as well. Individuals will use their social network to manage their calendars, send e-mails, book trips, look for a new job – and also play video games.
In effect, “social networks are emerging as a personal portal,” said Joe Chen, chairman and CEO of Beijing-based Oak Pacific Interactive. The company operates Xiaonei.com, China’s largest social-networking site.
But has social networking emerged yet as a business? The answer is yes, according to Joffe, who spoke at the recent Asian Private Equity & Venture Forum \ Hong Kong 2008. He noted that several social networking sites have successfully gone public over the past four years: Germany’s Xing, QQ.com from China, and Japan’s Mixi and Mobile Game Town.
Significantly, the sites are market leaders within their respective home countries, said Joffe, despite the entry of several well-known overseas brands into the region.
Patronage and profits
In addition, there are Asian sites that already claim internet and mobile users well into the millions. Instant messaging service QQ, run by Tencent Holdings, tops China’s charts with 500 million online users and $520 million in revenues for 2007. Others are generating rapid revenue growth and are profitable. By contrast, Facebook had not yet reached profitability in 2007, according to Joffe.
One key reason for the difference in earnings is that Asian sites rely on a broader range of revenue sources than do their western counterparts. For instance, Facebook depends primarily on ads, brand pages and digital goods to bring in dollars.
But many of the Asian sites tap supplemental business from fees by users. The fees go toward purchases of music and games online – even while individuals use the sites to socialize or search for jobs within the network. This more comprehensive strategy helps such sites as Korea’s Cyworld generate 80% of its dollars from users, compared to almost no user-generated fees for Facebook.
Investors sniff opportunity
Venture investors smell the opportunity and are turning their attention to finding the next home run in the region from social networks. “I think the next Baidu could come from social media,” predicted Finian Tan, managing director of investment house Vickers Capital Group.
Tan made his name as a venture tech investor in 2000, when he led a $7.5 million investment for a 25% stake in Baidu, China’s top search engine, for Draper Fisher Jurvetson ePlanet Ventures.
Today, Tan is equally enthusiastic about the opportunity to make money in China from social networking and has moved from Singapore to Shanghai to make several investments in the industry.
Also making a big bet on social networking is Softbank Corp. In April this year, the Japanese media giant led a substantial $430 million round in Chinese social networking startup Oak Pacific Interactive.
Social rivalry
Venture investor Peter Hua, a managing partner at Softbank China, outlined the opportunity for social networking. He listed several categories and players in various sub-segments: friendship, matchmaking, gaming, video sharing, location-based services and e-commerce. In many of these areas, several rivals are competing for the lead, Hua noted, with no clear winner yet.
For its part, Oak Pacific has set some of the new standards in social networking within its home market. After raising the hefty $430 million round, Chen allocated more resources toward his three key sites: Xiaonei, the Facebook of China; interactive entertainment portal MOP; and Kaixin.com, a social gaming site that Chen said “is growing like a weed.”
But with several companies vying to be leaders in the same businesses, the trick to making money is to build scale exceedingly fast. “The money always follows the eyeballs,” said Chen, adding it takes about “300 million page views per day to start to make massive money” in China.
For Chen, a key way to expand is to acquire sites and then merge them into internally developed sites. Chen did exactly that when two years ago he acquired Xiaonei. The site has grown from 100,000 page views daily to nearly 10 million per day, he said.
Strategic gameplay
Interestingly, social gaming – which enables users to play games online opposite other network members, including far-flung friends – accounts for 25% of the site’s traffic. With all its brands included, Chen claims that Oak Pacific has emerged as the leading web-based gaming provider in China, as measured by daily log-ins. He expects that social gaming will continue to be a strong emerging theme for Oak Interactive and most social networking sites.
In China, cutthroat competition has led some business sectors to become crowded so quickly that even the early entrants bow out. Such was the case when Oak Pacific entered the video sharing business two years ago. Chen recalled that he and his team decided to cut the operation when some 200 companies emerged in the same area within two months of his own firm’s video launch.
Despite some detours, Chen remains convinced that “the consumer Internet is one of the brightest spots of the global economy for the next few years.”
Recession-proof model
Chen and others expect that social networking can only become more popular. One reason is that no matter the business model, social networks can gain traction during good or bad economic times.
Indeed, industry experts predict that this form of online communication and entertainment will prosper during the current depressed economic cycle as people look for less costly ways to spend their time and amuse themselves. In China, for instance, youngsters can play online games in internet cafes all day for only RMB 10, or about $1.50.
Moreover, for some people, their virtual life has become nearly as important as their real life. Some 3 billion people are expected to be on the internet by year-end. It’s not that difficult to fathom that “for many, their golf club membership is equal to their Facebook network,” said Stefan Rust, founder and managing director of Catalist Group, a digital media and technology investment firm. He cited research showing that 78% of users value their online social network equal as much as their real life network.
It’s no wonder then that social media is capturing a larger share of the online advertising market. In China, the digital ad market is $1.4 billion, of which some 20% is directed to social media – or approximately $280 million. Chinese portals account for 60% of the $1.4 billion, while online search sites take up the remaining 20% of the advertising in digital media, according to Rust.
As the market builds, social networks are increasingly forming around specialized demographic and interest groups – from retirees to college students. Along with this shift, a window has been opened for advertisers seeking to reach specific potential customers. These new specialized sites can command a far higher price for their advertising, Rust pointed out, and the users can often have greater control over which ads they see.
Mobile media emerging
Another major trend among social networks, particularly Asian ones, is that the access point is changing from the internet and personal computer to mobile communications devices.
Already, mobile gaming in China is becoming a big business. The next big money-making opportunity could be searches over handsets.
Oak Pacific’s Chen, for one, predicted that individuals may pay more attention to banner ads on mobile devices than those on their personal computer. He noted that people tend to linger longer on one mobile site instead of jumping around quickly from one web page to another – the typical pattern when surfing the net from a personal computer.
But mobile search and gaming won’t reach critical mass for at least a couple of years. Chen pointed out that 3G mobile connections and browser-based phones will need to be commonplace first before such services can become truly engaging and hold user attention.
In the meantime, the mobile generation is creating new types of media. In Japan, for example, the newest invention is books that are written in small snippets and distributed via mobile channels. These so-called mobile novels are not produced as regular books until they become hits among mobile users. One bestseller sold more than 2 million volumes, said consultant Joffe, who noted that one full bookshelf at Japan’s largest bookstore chain is devoted to mobile novels.
Another new area that has taken off in recent years is user-generated media sites. One example is South Korean online newspaper site OhmyNews. Joffe said the site, which is written by everyday citizens rather than professional journalists, is breaking even. Such sites are helping to create a new paradigm in media that is more social, interactive and financially viable. - RAF