Chinese Social Network Sites Battle for Dominance

Xin Wei loves to connect with friends using the internet. A big fan of social networking site Renren, Ms Wei, 24, lives in Beijing and management studies and economics at Peking University. When not in class, she regularly signs Renren to chat with friends from college. "Every time I return from class I just turn on my laptop and use it," she says "As long as I am on the internet, I use it."

Ms Wei also uses Renren to get in touch with senior students at institutions to which she is interested in applying.

"From junior middle school to graduate school, most of my classmates or schoolmates are on that network. I use it to learn about the latest news," she says.

Reliable statistics are patchy, but the research company Analysys estimates that 269 million internet users in China have profiles on social networking sites.

But despite their popularity, these Facebook clones have often struggled to generate large profits because of a lack of advertising and revenue from virtual games.

"[The websites] are able to accumulate a huge consumer base, but if they don't have a good business model for revenue, I don't think this is sustainable," says Michael Zhang, an assistant professor and computer industry specialist at the Hong Kong University of Science and Technology.

It is perhaps fortunate for Chinese sites that they do not have to worry about being driven out of business by Facebook.

In China, Mark Zuckerberg's social networking phenomenon is blocked. Yet the competition in the second-biggest economy in the world is fierce.

Even without considering the increasingly popular Twitter-like Weibo microblogs, the market in China includes Renren, Kaixin001, Qzone and 51.com.

"The Chinese internet is different. With the exception of searches, where [the search engine] Baidu is the winner, there really aren't winner-takes-all sites," says Bill Bishop, an American who is based in Beijing and writes the DigiCha blog and used to head MarketWatch's consumer internet division.

"No one, for the most part, is going to emerge as the dominant player."

Just as no Chinese site has emulated Facebook's dominance, none has replicated its money-making potential.

While the Silicon Valley social networking site generates huge revenue through advertising and charges for users who play games or give virtual gifts, helping the company to a US$1 billion  profit last year, Chinese internet users are more reluctant to spend online.

The consequences of this can be seen on the balance sheets of China's most popular sites.

In the third quarter of last year, Renren had a net loss of $1.2 million, resulting in a fall in the value of its stock, about six months on from an initial public offering on the New York Stock Exchange that raised $855m.

More recently, Renren's stock has rallied after Facebook's IPO announcement. The company is valued at more than $2bn.

But there are signs that Chinese consumers are starting to spend more money online, and this could translate into improved advertising revenue.

"You see more dollars moving online, and dollars are moving to social networking sites over time, and you will see them being able to grow the revenue," Mr Bishop says. "But as big and fast-growing as the Chinese internet is, it's still a significantly smaller opportunity than the global internet guys are going after."

Since Chinese sites struggle for revenue, Mr Bishop feels Renren might be overvalued. He sees Tencent, which set up Qzone and bought a share in Kaixin001, as having better prospects, thanks to its "huge war chest" of money to invest and a "really smart team" in charge.

"It's hard to see how they won't emerge in a fairly strong position," he says.

For the third quarter of last year, Tencent reported that its profit jumped 14 per cent to a healthy 2.45bn yuan from a year earlier, despite the company's heavy investments in new ventures, including buying a share of the popular Chinese online travel company eLong.

Tencent is China's largest internet company by sales.

Still, the fortunes of internet companies can be especially difficult to predict, especially in China, where the whims of regulators are a factor.

In the past few months, state media reported the authorities were tightening rules to prevent the use of pseudonyms in online posts. This is seen as a move against anti-government content.

Weibo accounts held by Tencent, as well as its rivals Sina, NetEase and Sohu, are among those affected by the rules, which require new users and those who already have accounts to register their actual names by the middle of next month.

Reports have indicated that new registrations have tailed off dramatically after news of the regulations broke, illustrating the degree to which government edicts can affect growth in the sector.

With multiple players still vying for ascendancy, China's social networking sector will remain highly competitive.

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