Auf Wiedersehen! …au revoir, good bye, ciao, adios! | Cyworld closes in Europe

Here it is – announced on the Cyworld Europe page and on our friend Chang Kim’s “Web 2.0 Asia” blog.

We are often asked questions such as “If this service is so great and such a success in its home market, why is it not already a global leader?”. Most of the times, people asking this question have a ready-made answer: “It is too Korean” (or Japanese, Chinese, or whatever). This anthem is a chorus that often joins the origin and the destination country.

The fact is: regardless of the real reason, answering this way does not help to understand anything. Now looking into the Cyworld case: what could be the reasons for stopping the service after less than 6 months? (Cyworld Europe came out of beta in October 2007)

Usual reasons

(1) Top management is tired of spending money. Considering Deutsche Telekom and SK Communications have been working on the project for almost 2 years, this could be a good reason – SK announced they spent over 5 million USD in Europe. Now, Facebook is also losing money but hey – since when do we expect social networks to make money? Maybe since Cyworld in Korea, Mixi in Japan and QQ in China are all profitable (see our recent presentation at the Media’08 conference in Sydney here).

(2) Which top management? Is it Deutsche Telekom or SK Communications? According to the Korea Times and even better article here, it comes from SK who decided to pull the plug off markets that did not show traction and where there was lots of competition, and focus on those where they saw growth. In addition, MySpace launched in Germany and well, that’s competition.

(3) But is competition really a reason to pull out? Definitely, 6 months is a very short period to close operations, and competition is definitely expected in a market. In China, Cyworld is said to have over 5 million members, but they are facing QQ which has over 270 million active accounts! Compared to this, Europe seems like a walk in the park, and Cyworld China is rumored to have spent over 10 million USD promoting the service in the first half of last year. Remember they are not monetizing in any way yet. Of course money is an easy explanation and nobody will question on that. But why pull out of Europe where the market is much richer and less crowded?

(4) I know: it’s because the service is too Korean! Again, this is too easy. Manga are certainly “too Japanese”, yet they sell very well worldwide (just head for your bookstore to witness it). We think there is more than money and culture involved in the success of a service. And as for Cyworld’s Korean factor, we tend to think Cyworld Europe did a fairly good cultural due diligence. Now, culture is an important factor, but is not the key point.

So there we are: if not money, competition nor culture then what?

We think the reasons why Cyworld stopped in Europe are more than what is said.

[a] Management sells what board buys. Cyworld Korea was once a hungry startup then it got bought by SK and all founders left. Which responsible adult with a suit and a family jeopardize a promising career in handling operations in an unknown country? In China, our wild guess is that over 20 million USD were already spent in various promotional events to gather 5 million accounts. The number of active users is very likely to be below 1 million. That’s 20 USD / user in acquisition cost, in a market with a very low GDP/capita (monthly mobile ARPU is ~10 USD). In addition, the acquisition method makes the user base very loosely linked – something that is very un-Cyworld and lowers dramatically the user survival rate. Give us 20 million USD and we’ll buy you some users too. That’s what most Chinese Web 2.0 startups do with VC money.

[b] Cyworld Europe is not like Cyworld Korea. Just try to go to the US and Korean pages and you’ll get some idea. Notably, the digital goods market does not exist yet, the online payment infrastructure is embryonic, and the music market does not yet allow to have background music easily (BGM is a strong contributor to revenues in Korea). In a way, it is like driving a Ferrari in a place where you should ride a donkey.

[c] Pageviews vs. Digital goods. Europe and US are all about pageviews and advertising, while the digital goods market has strongly taken off in various Asian countries. One could almost say that markets with poor online advertising grow more easily a digital goods market. Again, this is something we explained last week in Sydney in our presentation.

So here is our conclusion: we think that regardless of the culture and money-losing operations, SK management saw more potential in markets where the digital goods market was growing faster.

Last, does Cyworld really stand a chance in other markets?

Sadly, we do not think Cyworld can turn a profit from the markets they currently address.

• Europe and US are doomed by the lack of digital goods market and poor online payment infrastructure within the demographics Cyworld addresses.
• China and Japan already have strong local players in Cyworld’s key segment and “online entertainment”.
• Vietnam and Taiwan might stand a chance but unfortunately for Cyworld, there are some pretty smart boys out there who work with us to get advice on both Cyworld and QQ.

What is more interesting is: can Cyworld concepts succeed outside Korea?

Concepts is what we sell, and the good news are: YES. Cyworld’s concept are succeeding already. Just take a look at QQ in China, this article from TechCrunch on virtual goods, or the Virtual Goods Summit in Stanford last year (though the latter fell both like PR from Charles River Ventures, they are quite interesting to notice).

What is still badly understood, however, it the quality of connections within social networks, and their core values. The next big thing will come from going beyond engineering and involving social theory in the design of the services.