As a follow-up to our previous post, and since there are still some ideas and rumors in the air, we thought about trying to understand better who is smart in this deal and, possibly, who got the shorter end of the stick to balance business thermodynamics.

Let’s start with an easy one: Softbank

We met briefly with Masayoshi Son last year during the GSM Asia congress in Macau where his speech was easily in the top 3 for vision and delivery, but more importantly we have been looking at Softbank as a group since the year 2000. If Softbank has hundreds of minority participations in unclear ventures (including a defunct one trying to sell diamonds online, where a friend was working - tough job), our opinion is that a deal of this size is monitored by the man himself and we will unfairly assume that it makes sense.

Son’s long-term vision proved right more than once with their Yahoo JV, the introduction of half-priced broadband, their takeover of Vodafone’s failing mobile biz, and a number of other investments, including Alibaba at a time where there was just a handful of boys running the company. So that’s it, we think Softbank saw in Xiaonei something similar to what Murdoch saw in MySpace.

Now, whether or not Xiaonei will bring interesting revenues remains to be seen. Pacific Epoch digged out some numbers

• 22 million registered users
• 12.7 million daily users by March,
• Xiaonei recorded 280 million page views per month
• Reportedly generating RMB 5-6 million per month in advertising revenue (that’s about 700K USD, or 10 million USD a year - so they’ll need about 40 years to cover the investment amount).

Another one that seems alright: OPI

Despite their lack of creativity, it’s difficult to say that a company receiving half a billion USD investment is not achieving something, so we’ll put them in the winning pack. However, an investment is not a M&A and the money does not go into the founders’ pockets that easily. They will eventually need to reach milestones and deliver something.

Grands winners: Doll Capital Management and the first round boys

We loved the quote from David Chao of DCM reported by VentureBeat, saying that the blue color is en vogue and that it reminded him of IBM. Good on you, Dave! Let’s face it: investors care about exits, generally not about entrepreneurs, clients or building good businesses. More than ever, your perception is your reality. According to a rumor (whatever that means), Softbank bought them out in this round, so they made their money. Save some champagne for us ^_^

Loser: Facebook

Sadly, Facebook has not properly entered the Chinese market yet, and this additional investment in an already solid player will make it all the more difficult for FB. Absentees are always wrong.

Special winner/loser prize: Wang Xing

As the original founder of Xiaonei in December 2005. He reportedly sold to OPI in October 2006 (11 months later) for 2 million USD (he likely split some with other co-founders, and paid his taxes, so maybe has 1 million USD left?). It is probably a bit harsh to label someone who made a million dollar in a year a loser, but if you consider the complete story, he probably did not get the best deal he could have. He left OPI in July 2007 to set up a Twitter clone (why change a winning formula?), but as Twitter had not found neither a business model nor raised significant money, it seems the man got a bit impatient and did not stick. He went on to create yet another FB clone in November.

Sadly, it seems the industrious Wang Xing, who definitely puts the hours in building companies, made “only” 2 million USD and probably spent quite a bit of it setting up its two following businesses (even though Chinese entrepreneurs seem to prefer investing other people’s money).

Could that be a lesson for aspiring net entrepreneurs?

If you consider the odds of “making it” among the 200 Chinese YouTubes and numerous FB-like SNS, the rare ones who make it can still be screwed and outed by later investors. We would advise those who are not willing to lose a couple of years of their life struggling with an unproven business and praying for a windfall (while running in the dark like crazy no to be outrun) to stick to their job, or join companies who are building businesses and not hype. Unfortunately, there are not many in China…

A few words of wisdom from Pony Ma

What does Pony Ma, CEO of Tencent can tell us about this? When he started QQ back in the years, he was far from alone on the market, but one by one its competitors abandoned as they could not find revenue models. As Pony Ma puts it (from memory) “Unlike my friends, I did not have any other idea for services, so I had no other choice but to stick to IM and find a way”. If Wang Xing had eaten fangbianmian a bit longer with Xiaonei, or sticked to a Twitter-like - now raising 60 million USD - he would have made a much better return.

In a way, it’s not that different from the MySpace boys - who each made much much less than the 580 million USD from News Corp could suggest. But they were “frontmen” for an in-house venture. Wang Xing was co-founder.

Our takeway lessons

• Get good people to advise you, or you’ll get a cheap deal
• Sticking longer can pay off (as most competitors abandon early) - though sticking longer does not guarantee anything (we have examples)
• Turning Internet ventures into proper businesses is still not an issue to attract investment in China
• This investment will push even more aspiring entrepreneur to jump onto the C2C bandwagon, building super-harsh competition in China and give more power to investors to abuse them. Fortunately, there are many VCs in China who need to invest (why are they in China if they don’t invest?), rebalancing power a bit as it brings competition among VCs.
• Businesses living as a mathematical “derivative” of venture activity will have great results! Lawyers to monitor deals and for due diligence, consultancies (like yours truly) to separate signal from noise.

As reported by TechCrunch, Ogilvy China Digital Watch and PacificEpoch, Softbank is leading a round raising 430 million USD for 40% of Oak Pacific Interactive (OPI), a holding company controlling Xiaonei, China’s most loyal Facebook copycat.

Sounds like great financial engineering for OPI

This story is a great example of what you get when you combine Facebook karma, Alexa ranking and US-educated Chinese execs who know how to raise money. If we go back in time:

In March 2006, OPI raises 48 million USD apparently mostly thanks to the pageviews they managed to gather on mop.com, a sort of glorified BBS put under they managed to list under the holy “social networking” umbrella word. Its main attraction is the “big hodgepodge” which is not unlike Japan’s 2channel.

In October, they buy Xiaonei with part of this money. Not too long later, they fire most of the staff from the video service UUmee, another of their acquisitions back in 2005, at which time they were planning a NASDAQ listing in 2006.

In November 2006 at Japan’s New Industry Leaders Summit, a Japanese invitation-only C-level mobile/Internet conference, James Liu, Co-COO of OPI presents the company as China’s “YouTube + Facebook + MySpace” combined. Cute. At that point, there was certainly VC money in the bank but likely very little revenues aside from Mop’s tasteful banner ads.

Whatever happens to Mop, DoNews and UUmee (which is not listed anymore in their online properties), it seems that OPI’s financial acumen made them acquire one of the possible winners in the Chinese market, at a time when US contenders like MySpace.cn (launched in April 2007) and Facebook are making efforts to penetrate the market (Facebook crowdsourced its localization a few weeks ago).

Taking some distance

When you look at it from a distance, it seems that OPI’s main success was to raise money, buy Xiaonei with it, then raise more money. Funny enough, they also inherited the original criticism for being complete knock-offs. There are not many white doves in China’s Internet scene.

Finding where is the limit between “inspiration” and “blatant copy” is left to the reader, with a reminder that Facebook did not invent alumni networks, nor application platforms.

Will Xiaonei make money? Where is the next exit?

One of our clients in the online community space with over 9 million registered users said a while ago “it is almost impossible to make money with online communities in China”. 9 million registered users usually puts a SNS or community on the map (Japan’s leading SNS Mixi has 14 million and over 2 billion USD market cap), but not in China.

QQ made 500 million USD last year, mostly with personalization functions and 300 million active IM accounts - Xiaonei is still very far from that and the online entertainment/communication mindshare is already taken. The online advertising market in China is in the 1bln USD range, about 20 times smaller than the US market, so there is no way Xiaonei reached Facebook’s 150 million USD or MySpace 800+ million in revenues anytime soon. Now, the money they are raising certainly buys them a lot of time.

It is likely OPI will look for a pleasant NASDAQ or even Japan listing as it will likely take a long time to reach a decent revenue phase.

Another possibility that sounds very Softbankish

This other possibility is that Softbank might be interested to leverage Xiaonei’s know-how to launch their own Facebook copycat in the Japanese market, which is still largely open as local competitors Mixi and Gree offer a very closed and non-customizable offering.

When we discovered Slideshare, the service looked fairly innocuous: putting presentations online. Alright. Have we not seen that somewhere before? It seemed well organized and easy to use, but its real value started to unfold when we started browsing the material that was made available there. It became clear that there was a lot of very good stuff, especially in the Internet and design fields.

So knowledge was there. But after we started to publish some of our own work (especially the one on social networks), it became more and more clear that Slideshare was also a marketing and networking tool. Marketing as people republished, downloaded and distributed our branded content around (”sharing is caring”), but also as we got more and more interesting contacts from companies and individuals who connected not on reputation, but on the ideas level.

And this is interesting. Most social networks list people promoting their face or tastes (MySpace), their profile (LinkedIn, Facebook) or using their friends (number, names) as faire valoirs. This is a fairly shallow way to connect, and does not tell much about who you are. When you put up a presentation you made, you’re stripping in front of an audience (some say “presentations are the new rock”), and you cannot hide (or everybody will see you are hiding - usually behind bullet points and excel graphs).

Though it came up as an unexpected side effect, Slideshare is thus also a social networking tool based on ideas and storytelling. Unfortunately, it is still more difficult to monetize ideas than pageviews, so Slideshare has a bit of work to do on business models. That being said, the educational value of what they collect is incredible and as people spend 100,000 USD on a good degree in US, there are chances they might spend a bit on getting new ideas, even online. On this topics, an interesting presentation was just put up by presentation acrobat Garr Reynolds, who runs the PresentationZen blog.

To conclude this piece and as we are now working on putting several new presentations online, we thought that one of them was particularly suited to this. It is a presentation we did at the end of last year at the Wireless Developers Conference in Beijing on “Dogs and demons in telecom“. To our great satisfaction, Slideshare is a dog. To know more, feel free to browse below!

| View | Upload your own

Many thanks to Alex Kerr, author of “Dogs and Demons: Tales from the Dark side of Japan” who opened our eyes and made us able to recognize what is a dog, and what is a demon.

Following The Guardian reporting the launch of MySpace in Korea we thought about writing a specific piece on MySpace’s chances there, but in a few days other news about the visit of another famous Valley boy motivated a larger story. Among the recent visitors to Korea, Japan and possibly China:

• MySpace | Chris DeWolfe, CEO | MySpace was the “previous Facebook”, but is pulling in more revenues. Fiscal 2008 (ending June): about 750 million USD from ads, up from 500 million USD the previous year, and profitable. Facebok pulls in 150 million USD, loss of 50 million USD.
• Slide.com | Max Levchin, CEO | Slide is one of the leading Facebook applications providers. Max Levchin is also the former co-founder and CTO of Paypal.

Digital goods finally quoted

Here is a quote from Slide’s CEO interview with Charlene Li from Forrester at the recent Web 2.0 Expo (quoted from VentureBeat):
“The future of social apps are split between brand advertising and direct-to-consumer sales,” he said. The latter is what the next few years will be all about. He said he got back from Asia, watching people make billions of dollars selling virtual goods, like eyes or hair for characters in online games or social networks.

This is a pretty strong statement - upon which (according to VentureBeat’s report) there was no comment and no follow-up question! QQ making over 500 million USD last year, most of which from digital goods (close to 350 million USD) should be a pretty good validator for this model but hey - it’s Asian, not American, and certainly sounds irrelevant until you actually try it or show it to a US teenager. Unfortunately, most business people don’t bring teens with them on business trips to Asia.

It might be interesting to put this market into perspective with the online ads market in China: 1 billion USD in 2007, and all portals, search engines and Web 2.0 companies fighting for it.

QQ revenues (mostly with digital goods) are worth half of the total Chinese online ads market.

If it’s still difficult to understand why digital goods is a proven and excellent model, probably it will become clear when it will be already everywhere in a few years time.

Digital goods carry emotions and value, regardless of physicality. A printed picture is just paper with data on it. A packaged software with a DVD inside is just plastic and paper, with distribution and packaging costs.

Back to the visit

Highlighting the tough local environment with local competitor Cyworld, the article from The Guardian still largely reads like a press release from MySpace Corp, even making it sound like MySpace actually brings something new to Korea in terms of functions.
We think it’s potentially smart for MySpace to come to Korea as it gives them access to one of the world’s best Internet laboratories to test new stuff, and learn a lot of very cool Korean services and concepts that does not exist anywhere yet.

Actually, they already did a bit of homework as the “minilog” and customization with animations is clearly lifted from Cyworld’s “mini hompy” (launched 7 years ago…). So it might help MySpace test-drive features, but mostly learn from the Korean market to export the best ideas to their global (mostly US) service. We call that “Innovation Arbitrage” and that’s what we do at +8*.

Of course they need to have enough local leeway and proper reporting structure so that their voice does not sound like a distant kayakeum. This reporting and agile management has been among what prevented eBay, Google and Yahoo to succeed by themselves in Korea, Japan and China.

We actually found this Reuters/Billboard piece reproduced on the New York Times and read it with the feeling of a mother seeing her little daughter come home with her first drawing. After hearing for years that Ringback tones were big in Korea, then in Asia (article from Red Herring in 2005), the US of A are finally starting to catch up. Well done.

Reading the Billboard piece, where it all sounds like a great innovation that is finally coming mainstream thanks to the efforts of operators and music majors, we could not help but think that more than one important pieces were missing from this article. Let’s look more closely:

First, ringback tones are an old story

They started in 2002 in Korea and quickly reached over 40% penetration. We know this quite well and even co-published a report on this phenomenon in early 2005 (”Mobile music best practices from Japan and South Korea”).

Second, the “WiderThan Division” of RealNetworks deserves more respect

WiderThan used to be a subsidiary of SK Telecom, the leading mobile operator in Korea, and was sold to RealNetworks in September 2006 for 350 million USD. We think the main reason was that WiderThan had great platforms and know-how but had trouble selling them overseas. Well done for RealNetworks (and SKT).

Third, the claim that “the key to expanding the format is marketing” is very lousy

Why is that? One way to explain this is to talk about ringtones:

• Ringtones did not need marketing to succeed (actually, we tend to think that most successful mobile services do not need marketing - but this would require a longer explanation)
• Ringtones spread virally
• Ringback tones are much more viral by essence: anybody who calls you hear it, and people who call you tend to know and trust you (vs. ringtones that random people around you hear)

So ringback tones SHOULD spread much faster than ringtones, if only by their viral capabilities.

In addition:

• Ringback tones are a network-based service, which means you don’t need to change anything on the handsets to spread it (vs. need to customize ringtones to dozens or hundreds of handsets), so the technical barrier and production cost is even lower.
• As a network-based service, there is no download! So no network speed problem, or difficult ten-steps operation. So the usability is also much better.

All this already shows that Ringback tones are a service that is very superior to ringtones on many critical aspects. But there is more!

The fact that ringback tones succeed only now illustrates quite a few interesting things

If ringback tones are so good, why have they not spread earlier? Especially since it was a proven money-maker in several advanced markets. Well, here is the start of the sad behind-the-curtain story. It starts with looking at what the barriers for ringback tones to be implemented are.

One important point for ringback tones - being a network-based service - is interoperability: I am with carrier A, you are with carrier B, if I cannot hear your RBT, the perceived value of the service is much lower for me (and zero for you). It is the same with SMS: if it is not interoperable, it is much less useful. While it is as clear as Wahaha water to people dealing with social networks every day (and aware of Reed’s and Metcalfe’s Laws), it is not to telecom people who are used to walled gardens.

In addition, if ringtones were using mostly music scores to sell MIDI-like music (so no real need to negotiate with music labels), ringback tones usually make use of original recorded music, so no way around talking to labels. Being conservative beasts, it takes ages to build a decent catalog and one-stop-shop for users.

We won’t comment on price points - operators being unnecessarily greedy with any content or service mostly because they consider separate service P&L (”I am the music service manager”) instead of looking at the overall value of innovation in terms of indirect revenues such as gathering new users or raising the data ARPU. SK Telecom in Korea and KDDI in Japan understood that perfectly with music. The rest of the world’s mobile operators are still stuck in the “let’s make money from music!/games!/etc.”.

Another point is that ringback tones are essentially a 2G service. The problem with that? Well, if you release a new funky service on 2G, you are not going to help migrate your users to a 3G network this way, it might even keep them happy for another 6 months to a year! So better not do it too early, or - why not - let’s label it a 3G service, customers don’t really know what is 3G anyway so why not use label “3G” a 2G service and use it to promote 3G :-) ? Only lonely experts will laugh at the irony.

To summarize, the success of ringback tones is:

• Proven for at least 5 years in South Korea
• Not primarily due to marketing, as it is viral
• Limited by interoperability, songs catalog (sometimes also sound quality), price point and strategic decisions to not launch or not promote the service

Again, congrats to US carriers and record labels. It seems that blindness to Asian markets only delayed this success by at most 5 years. Ringback tones are super great as they essentially cost nothing to produce and distribute aside from a few platforms and servers here and there in the network, so the margins are totally indecent (like ringtones and SMS - and of course much better than CDs!).

To conclude, we would like to mention a recent meeting with a very large telecom hardware and software provider. We met with executives of this company about ten days ago and they were telling us about the trouble they have selling their RBT solution as when they talk with operators outside Asia, their prospects all say “yes, we know RBT, it’s an Asian thing. It’s not working here”. We could almost continue the story in our head with “…because Asians like karaoke”.

Of course our comment was that we could help build a case explaining how RBT can succeed outside Asia. The Billboard article comes just on time and is a marvelous illustration of what we call the “Not-invented-here Spiral of Oblivion” (until we find a better name for it - to join the list of Wikipedia’s cognitive biases).

The spiral goes like this:

• First make fun then stereotype a foreign thing
• Re-invent it later
• Have it spread
• Forget the whole story to start over with another case.

It happens so that Asia have seen a lot of cases follow this path. Among our favorite examples (we are happy to prepare case studies for interested customers):

• Text messages
• Ringtones
• Screensavers
• Ringback tones
• Games
• Games for girls
• Full song downloads
• Online casual games
• Digital goods (read our free sample cases on Cyworld and QQ)
• Citizen journalism

But there is more to come!

• Human-powered Internet search
• Meta-blogging
• Content scrapping
• Personal resource planning (PRP)

Explanations on those new concepts (from Korea) will come in a future post. To learn a bit more, feel free to visit our presentations on slideshare.

When our colleague peaked in our office and said that, we thought “Come on! It’s April 1st…”. Then we opened all: YouTube, BBC, Flickr, Blogger, Wordpress and… Wikipedia! All responded beautifully, even BBC to a search on “Tibet”.

Damn. Not a joke.

Internet censorship in China is a long-time favorite topic of Western media and it is quite difficult to have a discussion about Internet innovation without having it become the center of the debate. Google has 255,000 entries on [ “internet censorship” AND China ], whatever that means (only 77,500 with USA - including an entry on Wikipedia mostly on sexually explicit stuff - which is censorship too). Most Chinese do not really care, or sometimes think it is actually the government’s job.

This surprise was enough to trigger a post and some questions:

• Why is this happening? No idea. Especially at a moment where things are not especially quiet.
• Until when will it last? No idea either.
• Who is in charge? Jingjing and Chacha, the two Internet police mascots might have taken a day off, but answering to the Government on this must be somebody’s job.

This was entertaining enough, but thinking again about the discrepancy between Western and Chinese points of view might be worth clarifying some elements.

• First, China has never had so much media activity, and the Internet is the most open of all.
• Second, Chinese are not used to express political views, so it is like a muscle that is not trained.
• Third - and most interesting - the framing of the topic is very biased and confusing.

What framing?

It is when you use “religious zeal” for “fanaticism” (from Schopenhauer’s “Art of Controversy“, circa 1830). Or using “parental control” for “censorship”. The very question used in the survey of Chinese netizens is biased “who should control the Internet” - what would be the answer in the US of A? The CIA? Nobody? Everybody?

The “control” can be understood in many different ways: from “guarantee that the content is not illegal or harmful to minors” to “delete the content that is not aligned with the ruling party’s views”. Re-reading Orwell’s 1984 is also a great source of inspiration on media and politics management.
If you’re interested to learn more about the technicalities of internet filtering, it’s actually quite a tricky thing according to this pretty detailed country study.

Last: who cares?

As we sit in our office browsing Wikipedia and BBC with the joy coming from avoiding a 3-steps process of going to www.anonymouse.org then copy/pasting the URL, we cannot help but wonder about all the mystery of this. Foreign media might even report about it (as foreign correspondents probably like Wikipedia as much as we do). But it is likely Chinese netizens will not even care 1% of what foreigners in China, or overseas do: why would they care about sites in English that they likely never used. Wikipedia? Just go to Baidu Zhidao or Baidu Zhishi. BBC? Sounds interesting… what is it?

Foreign media care about freedom, openness, etc. with often very idealistic views on their own markets (is there really no filtering outside China?). What we can tell from the inside is that there is certainly significant damage done in forging people’s views and identity by holding a mirror showing only one side of their face. Would an open Internet (i.e. combining the Chinese-filtered and the Western-filtered) actually change something is another question.

Richard MacManus - fellow keynoter @ Media08 in Sydney earlier this month and Chief Editor of ReadWriteWeb - honored us with an interview following our presentation on SNS. It is great to know Richard and we’ll try to get him to visit us in Beijing, Tokyo or Seoul so that he comes to appreciate even more New Zealand’s clean air, green and blue landscapes :-)

We reproduce the interview, which comes as a great complement to the presentation (remember this was a 20 minutes speech during which we were actually saying something on top of PPT slides).

| View | Upload your own

As we received quite a few comments on this presentation, let’s clarify a couple of things:

• We know Facebook and QQ are different. This is why comparing them is interesting.
• We don’t think Facebook is failing in Asia (the interview might sound like we do). We think it has not tried yet and that the place is quite difficult. Actually, our understanding is that the best “blue ocean” in Asia for FB is… Japan. China makes the headlines but is very competitive and very very few companies make money (Chinese included). Japan is the world’s #2 online advertising market (FB’s model) and is still quite empty yet for business/alumni real-name networking.
• Numbers are rounded for easier presentation (it also helps us avoid cutting our yellow dudes in quarters).
• Figures for Cyworld are estimates as the company is not listed (Cyworld is run by SK Communications, a subsidiary of SK Telecom, part of the SK group).
• Our purpose is to highlight local successes and learn from them. We think stereotypes usually get in the way and we work at debunking them. We don’t think Asia is perfect either, but they are actively learning from the West (reading ReadWriteWeb and TechCrunch ;-) ), while Westerners are on a LAN.
• We write Facebook as #4 because all others are profitable. If you search enough, you can always find a metric with which Facebook will be #1 (number of applications, etc.), but listing it #4 is not only a potentially eye-opening fun trick, but also the reality on a business point of view (in a world where businesses are supposed to make money). That being said, FB has the potential to turn into a great cash machine, maybe earlier than most expect.
• Comments are very much welcome at info [at] plus8star.com.

About +8* | Plus Eight Star (in case you’re visiting for the first time)

• Our business is identifying best practices in Japan, Korea and China and bringing them to our clients. We call it “Innovation Arbitrage”, you can call it also “Benchmark” or many other names… “Digital Silk Road” maybe :-) ?
• Our clients are companies around the world including Telecom, Internet, Mobile content, Tech companies, Media, Advertisers, Investors and a bunch of others. Our team is not large and we are very focused so we select our clients as much as they select us.

++ READWRITEWEB INTERVIEW ++

Richard MacManus: One of my co-presenters at this month’s Media 08 event in Sydney was Benjamin Joffe, Managing Director at Asia Internet consultancy +8* and Co-Founder of MobileMonday Beijing. At Media 08 Benjamin discussed the leading social networks in Asia. In particular he compared global leader Facebook with Cyworld, Mixi and QQ. According to Benjamin, Facebook is #4 in that comparison. We thought it would be a good idea to do a Q & A with Benjamin, to find out why. Also we’ve embedded Benjamin’s presentation below (also available here).

Q | Facebook has enjoyed the media spotlight for over a year now, but it is still far from ruling the world. As Asia is said to be at the forefront of communities, what are the services that dominate there?

A | It is interesting to see that Facebook has almost no presence in the three markets we cover: China, South Korea and Japan. In China, QQ dominates by far with 300 million active accounts, Cyworld has close to 20 million in South Korea while Mixi has 14 million in Japan.

Q | Those are pretty big figures for subscribers. Even so, Facebook has a good portion of them globally and is losing money. Are the Asia social networks making money?

A | One thing to keep in mind is the addressable population: QQ only deals with China, Cyworld addresses seriously only Korea, Mixi is only in Japan. Corresponding penetration rate among Internet users are: 150% for QQ, 57% for Cyworld, 15% for Mixi. It becomes even more interesting when realizing all three are largely profitable. Notably, QQ had 523 million USD in revenues in 2007 and 224 million operating profit, with only 13% coming from advertising! This is more than Facebook’s total revenues. Moreover, Facebook was still losing money last year (and likely this year).

Q | How do those services manage to turn such profit?

A | QQ and Cyworld make most of their money from digital goods - from background music to personalization, avatars or casual games. The introduction of an online currency supported by a variety of payment systems has helped lower the payment and monetization barriers dramatically.

Q | Are digital goods the next big thing?

A | It is certainly a great way to monetize a community. The West has been slow at catching up but digital goods are a proven monetization method on the Internet almost since Cyworld launched in Korea in 1999. Casual games are also a great money maker: imagine users were offered attractive high-quality Facebook applications for 10 cents. Many would pay, but today they have no way to.

Q | If it has been around for so long, why is it coming so late to US and Europe?

A | We see two main reasons: first, the West is not looking closely at Asia. When it does look, local successes are usually stereotyped, which prevents deeper understanding. Some great services like Naver’s Q&A (which was Yahoo Answers’ inspiration) were created there, mainly because the US do not have the lead anymore in Internet infrastructure, so local talent managed to come up with great new ideas. Second, most non-US markets have not developed a very rich online advertising market, and had no choice but to find alternative revenue models. In a way, the rich online ad market has been holding back innovation in the US, and forced most Internet companies to design their service around pageview as a main metric.

Q | Is that a problem?

A | It can be, as the focus becomes to generate more pageviews, not make the service better. Users are mere “eyeballs”, while the real clients are advertisers. The revenue mix defines the service DNA. We even came up with a new metric: ARFU for “Average Revenue From Users” (rather than per user, for ARPU). With this in mind, ARFU for Facebook is almost zero, while ARFU for QQ is 87% Internet + mobile combined.

Q | What are the key lessons from those successful services?

A | First, that users are willing to pay for services - even in China! Second, several companies in Asia have already solved a number of headaches on how to make it work and can help save a lot of time by adapting their best practices. Third, that the main barrier is the persistent bias that all US stuff is great, while Asia just copies. I don’t think QQ will make a bid on Facebook but there might be a need for a strong eye opener to realize that inspired by the West, Asia has made incredible advances that can now help us in return.

Q | Are those companies trying to enter foreign markets? Cyworld just pulled out of Europe and is not doing too well in the US either.

A | Cyworld tried China, US, Europe and Taiwan. Mixi is trying China. QQ has entered US via a content partnership with AOL on casual games. In most cases, they do not do too well as they send or hire managers and not entrepreneurs. Also, they often face tough competition from incumbent players while they dominate their home market. So they have less market acumen, less hunger and face a difficult timing. Those are the same reason why Facebook and MySpace are weak in those key Asian markets. That being said, the fact that they are not able to succeed themselves does not invalidate their concepts and business models. For instance, Xiaonei in China applied the early Facebook model (alumni) and is doing very well in terms of users. Who would say Facebook is not good even if they fail in Asia? The key is to focus on service concepts and business models, rather than on how well the companies execute them out of their home market. As for Cyworld, it is important to notice that the foreign versions are very dumbed-down compared to Korea’s, where they enjoy a mature payment infrastructure and digital goods culture. If so many million people use the service, there must be something to learn.

Note: +8* is offering free samples of their research on both QQ and Cyworld at www.plus8star.com. Also see ReadWriteWeb’s review of QQ last year.