- Following past experiences, Facebook chose an indirect approach in China and opened sales offices in the country to attract local merchants to publish ads abroad.
- Instagram was introduced in China with a sharing capability into Sina Weibo and gained popularity as another part of the indirect approach.
- The recent use of Instagram in the Hong Kong riots drove the Chinese authorities to block the site and put Facebook’s relationship with the Chinese government at risk that may have a long-term impact on Facebook’s earnings.
China is one of the hardest markets for western internet companies to enter. Not only do the companies have to comply with the government’s requirements, but also need to compete with government-backed rivals that have almost unlimited resources in an uneven competition.
Facebook (NASDAQ:FB), Twitter, YouTube, Google and Yahoo are only a few examples of the western internet companies that were blocked in China either in order to prevent future protests or in order to support the local Chinese internet industry. In 2009, Facebook was blocked in China after protestors taking part in the Ürümqi riots used the social network to organize protests against the Chinese authorities. However, the fact that Facebook competed with a local Chinese social network named Renren that fully complied with the censorship requirements probably helped the Chinese authorities decision to block the popular social network. Similar incidents have happened to many other internet companies. For example Twitter, that competed with the local microblogging network Sina Weibo, was blocked before the 20 years anniversary to Tiananmen Square and was never active in China again. Another known example is Google that competed with Chinese internet giant Baidu and was blocked in 2010 after it removed the self-censorship in 2010 following the hacking attack against the company.
With these severe conditions for western internet companies to succeed in China LinkedIn took a different approach when it entered the country and decided to apply self-censorship that is aligned with the government censor requirements. China has a critical role in LinkedIn’s growth plans. The professional network generates most of its revenues in the United States, and only 9% is generated in the APAC region which also includes other Asian countries apart with China. LinkedIn believes that the expansion into China will produce the growth the company was looking for and increase revenues generated in the APAC region to improve the balance between US revenues and international revenues.
Facebook’s case is similar to LinkedIn in the sense that the company needs to penetrate the Chinese market in order to develop new revenues stream and increase APAC revenues which in Q2’14 were only 15% of the company’s total revenues. After Facebook was blocked in China, the company had to engage in an indirect approach to generate revenues in China and opened a sales office in Hong Kong. The Hong Kong office was targeted at local companies that want to advertise abroad. At the beginning of July 2014, Facebook opened the first office in Beijing to directly contact with potential advertisers and not through the Hong Kong office.
Another part in Facebook’s indirect approach is to introduce Instagram in China and Hong Kong. Instagram gained popularity in China thanks to a sharing capability that was implemented into the Chinese popular social network Sina Weibo. However, that popularity can be tricky in China and after Instagram was used by the pro-democracy demonstrators in Hong Kong to share photos of police actions against the protestors, the Chinese authorities blocked access to the site in mainland china. The impact to the Hong Kong riots is minimal as the site is still active in Hong Kong. However the impact to Instagram is massive.
Facebook relied on Instagram and its sales offices in China to generate revenues from that region even though Facebook itself is not accessible from the mainland China. However, after the broad use of Instagram in the Hong Kong riots, the fragile relationship of Facebook with the local authorities in China is at risk.
As mentioned above in 2009 Facebook was banned in China after the 2009 Ürümqi riots and was not online again, and the same thing might happen to Instagram in 2014. That would be a critical blow to Facebook’s attempts to establish a sustainable operation in China. While Instagram block is severe to Facebook, it may drive even more severe actions against the Facebook sales office and will be a lethal strike to Facebook’s aspirations to increase its Chinese revenues.
Many western internet companies failed to penetrate the Chinese market due to the censorship requirements and political events that triggered the Chinese authorities to block their sites. After Facebook had been blocked in China in 2009, the company started sales offices to offer local merchants with global expansion plan the option to advertise abroad in a site that is more popular worldwide than its Chinese competitors. The extensive use of Instagram by the protestors in Hong Kong drove the local government to block the photo sharing service in an action that may have an impact on Facebook’s plans to expand into china.
Changes to Facebook’s operations in China and Instagram availability might not have a short term impact but for the long-term investor the fact that Facebook might have a problem to expand further in China might raise some concerns.
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