Our guest post on Techcrunch: Chinese Online Social Networks & Apps

The following is a reprint of our recent guest post on Techcrunch. A big thank you goes out to David Li and Richard Yu, who wrote on this article together with Web2Asia's George Godula. Additionally we would like to thank Season Xu, Keso, Herock and Web2Asia's Michael Hohenwarter who also contributed to this article.


Despite China's massively growing internet market, international giants like Google and Facebook are having trouble making gains with the 300 million Chinese online users. China's netizens are on average very young - 66.7 % of them are younger than 29 years and 35.2 % of them are teenagers- with social networking and entertainment applications being the most popular.


While companies like Facebook struggle to conquer market share in China and to create viable business models everywhere, their Chinese clones have built lucrative cash machines literally earning billions of dollars a year. Unfortunately, adopting Chinese methods may not help American SNS's due both to cultural differences in Chinese user behavior and industry practices as well as American SNS's own reluctance to innovate.


Chinese Social Networking is Dominated by Local Players

Bulletin Board Systems (BBS) have long played the dominating role in Chinese Internet life and still continue to be one of the most popular online platforms for social interaction. Registered user accounts, which are mostly anonymous, surpass 3 billion (users have multiple accounts) and 80% of Chinese sites run their own BBS. However in the last year social networking services, most of which require real name registrations, have exploded in China with 19.3% of netizens using them regularly.


Despite the popularity of social networking in China, the SNS market is dominated by local Chinese players, and Western networks have trouble adapting to Chinese culture and user expectations. Facebook does not rank among the top 15 SNS's in China while Myspace has only 6 million users (vs. the goal of 50 million users after 2 years initially proclaimed by Ruport Murdoch).


Meanwhile, China's leading social network Qzone, which is targeted at teenagers, may even be the largest of the world. Tencent, Inc., the company that runs Qzone, recently announced group revenues of over $1 billion in 2008.


As ad sales slump in the recession, only approx. 12% of Qzone's revenue stems from online advertising with the rest coming from virtual item sales such as applications and avatars. Internet ad spending in China is expected to reach $1.7 billion in 2009, which is about 4% of total ad spend. In comparison, the US is estimated to spend $25.7 billion reaching consumers online. These comparably low online budgets in China are largely spent at four large news portals, who earn the majority of online ad revenue. This forces most "smaller" portals to find innovative ways to monetize on their traffic.


51.com, which targets working class adults from rural parts of China, is the second most popular SNS in China with 130 million registered users. Concurrently, Chinese students flock to Xiaonei with approx. 40 million users. It is backed up with $430 million in funding from their parent company Oak Pacific Interactive and investors like Softbank Inc.. Kaixin001 , which skyrocketed out of nowhere to 30 million registered users from the middle of last year, targets white collar workers in China's largest cities by employing controversial invitation techniques and copying apps directly from Facebook.


Yet the astronomical growth of China's SNS's can be attributed as much to its massive market size as to its cultural norms and values. Social networking apps can hit hyper-viral levels in China due to a higher tolerance of intrusive app invitations. It is not uncommon for apps to essentially force new users to invite people and perform tasks before being able to join their friends online. Once friends have joined they are required to interact much more with the apps and advertisements than on Western applications. While this model is not replicable for the US market, certain aspects of this strategy/cultural mindset are necessary if companies like Facebook or Myspace want to compete in China.


Open Social Networks are Not So Open in China

In the middle of 2008, Myspace was the only SNS to support OpenSocial in China. Despite Google's effort, the adaption of OpenSocial was slow among the major SNS. Eventually, other platforms caved into the partnership with Google with half-hearted support for OpenSocial. Apart from some of the large SNS mentioned previously this included, City!N, Yiqi.com as well as the business SNS Tianji and BBS Tianya. Other SNS such as Douban, Hainei or news portal Sohu had originally announced to join OpenSocial but then never implemented it, choosing an F8 style API instead. Today, only one of the top 50 apps in China's SNS runs on OpenSocial despite the hard work put in by the Google team in China.


When Xiaonei and 51.com at first opened their own platforms, their terms of services outraged the developer community with clauses that practically blocked all monetization opportunities and a shared user base with their own websites. The developers launched several public protests against the SNS's including the website www.anti-opensocial.com to rebel against hypocritical support to these "fake open" platforms. The executives from these SNS's did respond quickly to the developers demand and changed the TOS to more reasonable terms allowing limited monetization opportunities for the developers.


Unfortunately, most SNS's continue to ignore "Open Social" practices, opting for the more familiar "Guanxi paradigm" in business practices with third parties. The term ''Guānxi'' describes the basic dynamic of gaining influence and receiving favors within social relationships, and is a central concept in Chinese society. For SNS's, this means that rather than developing an open ecosystem, they focus on dealing with third parties individually and face to face. New Open Social Networking platforms (or better put, "selectively opened") such as Yahoo's Guanxi, Tencent's Xiaoyou and Tianya court established third party app developers like Five Minutes while largely ignoring the wider developer community.


Additionally, ad sales are also strictly controlled by the SNS themselves even though 51.com set a threshold of a $35k fee to be paid for app developers to operate their own ad revenue based applications (which until now no developer was willing to pay).


Keso, China's most widely read tech blogger, who we had asked to contribute to this article through China's online expert panel BloggerInsight, summed up the situation by saying "Despite an open platform strategy, Chinese SNS are still competing with each other on the application level".



Imitation of Facebook was only a Launching Point

Chinese sites are notorious for their C2C strategy, or "Copy to China". This applies to the app market in the same way as it did to the SNS's and all other Web 2.0 and eCommerce services. A year after Facebook introduced the F8 open platform, Xiaonei.com followed suit and announced its open platform in July 2008. The developer group xCube on Xiaonei attracted individuals and companies interested in third parties apps. Yet Chinese outsourcing developers such as Apptz and Ismole armed with experience working on Facebook applications made significant inroads by launching several apps and attracting millions of users in just a few short months.


At about the same time, the apps space also felt the power of C2C with copies of popular apps on Facebook such as "Friends for Sale" and "Parking War" popping up on just about every SNS in China. Other leading SNS's such as 51.com and Comsenz!'s Ucenter Home (similar to Ning.com) launched their own open platform soon after Xiaonei's effort.


Chinas 51.com first SNS in the world to open up payment API

While Chinese SNS's started out as mere clones of existing sites, they've managed to innovate the business models to create a very lucrative market by cementing the relationship between application developers and the site's user base. Happy Farm, the most popular app in China reportedly collects well over $75k month through installations on various platforms, and according to Chinese application tracker, Appleap, the value of the total SNS's apps install base is approx. $4.5 million.


Opening up the payment system was one of the most anticipated announcements for Facebook's developer conference F8 2008 but the company failed to create an integrated ecosystem for users to buy and sell apps. China's SNS's took the great leap forward in this area when 51.com became the first SNS in the world opening up its payment system to third party developers in 2008. Users pay money to 51.com and receive virtual coins which they can then again spend on third party applications. The revenue is split 50/50 between the SNS and the developer.


Facebook on the other hand currently does not offer developers access to its payment system. If a third party application redirects Facebook users to their own website and payment processor they usually lose the advantage of Facebook's trusted brand name and the majority of potential revenues.


At the same time, companies like Becomedia are cooperating with 51.com to bring OfferPal style CPS/CPA for virtual currency models to China. CPS/CPA is one of the fastest growing sector of Internet ads in China. This means revenues for the developers by trading their virtual currency for hard cash.


Season Xu from Five Minutes Inc. the maker of China's most popular app, confirmed the three basic revenue models for apps in China: shared ad revenues, income through virtual currencies, and customized development for branded applications. However he and Herock, a leading figure in the Chinese tech blogosphere who we also spoke to, expect a consolidation in the app development market soon with larger companies taking over and benefiting from effects of scale, rather than individual developers still being able to produce top apps.


What can Facebook and Western SNS learn if anything?

If monetizing a social network is so easy, then why hasn't Facebook opened up its payment API to third party developers? While the aggressive and intrusive hyper-viral aspects of the apps in China are not replicable in a Western Market, the problems for creating a more viable business model run deeper. Western companies cannot innovate in the same way due to institutional problems stemming from their own struggle for an identity and revenue.

Facebook has just recently announced a "credits" system, but it seems to miss the mark. The new system demonstrates little incentive for users to shell over money, and does not speak to the same need as paying for a social application that all your friends are already on and talking about. Facebook may seem afraid to become a marketplace for applications, because they are reluctant to be labeled as a social gaming network. Instead, they are a self-styled guru of the dynamic human interaction. If they opened up their platform to become an apps store, their major revenue streams would put them into a pigeonhole, calling their $15billion valuation into question. They obviously don't want to be labeled as a "gaming platform", and would rather make only very little money than fully depend on selling digital trinkets.

Like during the American Goldrush in 1849, where Chinese Merchants prospered while most prospectors went bust in search of striking gold, it appears that building viable, scalable businesses for Social Networking sites may still be an ancient Chinese secret for Westerners.

About George Godula

George Godula is the co-founder of Web2Asia (http://www.web2asia.com) - a market entry consultancy for Western Internet, eCommerce, online gaming & mobile application companies in China, Japan and Korea. Additionally the company incubates local East Asian startups.

About David Li

David Li has worked on social network systems in the past 10 years starting with OnChat, an in-browser graphical avatar chat system, back in 1997. In the recent years, David focused mainly on Facebook and social network applications having worked on some of the most popular apps such as Growing Gifts. He has lived in Shanghai for the past 6 years.


About Richard Yu

Richard Yu is a Seattle native in China. After spending time at Microsoft and RealNetworks specializing in online video, he consults for Shanghai based web startups while writing for his blog (http://www.iheartyu.com).

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Comments: 1
  • #1

    Luyi (Sunday, 24 May 2009 05:34)

    I can't believe it took me this long to find a blog on this topic. I was wondering if you knew what are the business models for most of the popular Chinese blogs? Is it mostly ad based? Is there something like Google AdSense in the Chinese web sphere? Are Chinese bloggers obsessed with SEO like English bloggers are?