ReadWriteWeb Interview: Facebook vs Asia’s Top Social Networks

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).

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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.