China’s hot Facebook clone will cool down

April 18, 2011

By Robert Cyran
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Renren has reproduced Facebook’s social networking model in China. But it’s leading the way in launching what may be the first big social network IPO anywhere. With more than 100 million users already and China’s 1.3 billion people on tap, investors will probably fill their boots — and only later worry about things like competition from Facebook itself.

Online battles tend to be winner-take-all events. Margins rise quickly with scale, making bigger doubly better. The effect is even clearer with social networks. Users gather where most of their friends are, and advertisers follow. That’s one reason Facebook has crushed rivals like Myspace and Orkut.

So far, Renren has only about a sixth as many users as Facebook. And even without competition from its giant U.S. role model, it isn’t yet dominant. The likes of the smaller but growing Sina Weibo and the upscale, if fading, Kaixin001.com still hope to become China’s default social network. Then there’s the possibility that Facebook will break through the Great Firewall of China, perhaps in partnership with Internet search leader Baidu. Mark Zuckerberg, the Facebook founder, seems intent on learning Mandarin — even though he is currently blocked from operating in the Middle Kingdom.

Given the potential threats, Renren’s founder, Joseph Chen, is asking investors to have faith. After tripling in 2009, revenue growth slowed to 64 percent in 2010. Suppose the company’s claimed 2 million new users a month and aggressive expansion efforts allow it to double revenue in each of the next two years to about $300 million. If the firm also manages to turn its 2010 loss into net margins of 30 percent, around Facebook’s level last year, that would mean about $90 million in profit. The $4 billion market value indicated for the IPO would be more than 40 times that, or almost twice the earnings multiple attached to Hong Kong-listed Internet portal Tencent Holdings.

On the other hand, Facebook’s own valuation, spiraling toward $100 billion based on private market deals, is a hint of the hype surrounding social networking stocks. Chinese Internet plays are also hot. Online video site Youku.com, for instance, has more than quadrupled in value since its barnstorming IPO in December. Throw in the potential scarcity value of being the first publicly traded social network, and Renren’s IPO looks a pretty sure thing. But over time, there could be a lot less to like.

Comments

Renren will do fine as long as it keeps buying out its local competitors like xiaonei and as long as the Chinese gov continues supporting them by blocking out any foreign companies.

The only way Facebook can get into the market is to let the Chinese police Facebook and use it as a tool to hunt dissenters. If Facebook does agree to this, which they might, everyone should drop it immediately.

When you create a Renren or QQ account, you have to give the company your personal email and password, so the Chinese state can police it too!

Posted by kc10man | Report as abusive
 

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