Murdoch's Mission to China
Wendi Deng, who's married to News Corp. (NWS) Chairman Rupert Murdoch, is up to some high-level international diplomacy.
At least that's what Murdoch told attendees of a Goldman Sachs (GS) conference on Sept. 20, according to press accounts of the remarks. Deng was in China negotiating a joint venture that would allow News Corp.'s social network MySpace to enter that market.
Murdoch & Co. have long discussed breaking into the Chinese market, and the comments fueled speculation that MySpace may be finding room in the world's most populous country sooner rather than later.
MySpace already operates social networking sites in Britain, Australia, and Ireland, and it's testing sites in France and Germany (see BusinessWeek.com, 9/11/06, "MySpace: No Free Ride in Europe"). But China, with 1.31 billion people, would represent MySpace's biggest and riskiest bet yet.
China's population spends a cumulative 1.8 billion hours online each week, compared with 129 million hours in the U.S., says Ken Marlin, managing partner at investment bank Marlin & Associates. If MySpace can tap that market, "the return could be astronomical," says Laura Martin, an analyst with Soleil-Media Metrics.
That's one of social networking's biggest ifs. With tight government regulation of Web content, low incomes, and fierce competition from established social networks, China "is a very cut-throat environment," says John Yunker, president of globalization consultancy Byte Level Research. "It's a tough market to crack. You can't assume you'll be successful in China."
In a best-case scenario, returns might not come for years: China's online advertising market is still in its infancy, and rates can be as much as 90% lower than in the U.S. Sure, startup costs would be low—Martin estimates they'd be in the tens of millions of dollars. But it would still take a decade to eke out a return on that investment, Martin reckons.
Just ask other U.S.-based companies making a go of the Chinese market. eBay (EBAY) remains in investment mode there, while Google (GOOG) is losing market share to Chinese rivals. According to a recent China Internet Network Information Center (CINNC) survey, local search engine Baidu.com (BIDU) has seen its market share climb to 62.1% this year, from 48% in 2005, while Google's share slipped to 25.3%, from 33.3% last year. Safa Rashtchy, an analyst with Piper Jaffray, says Google will never overtake Baidu.com in China.
Doing business in China hasn't been easy for News Corp. either. Over the years, Murdoch has publicly voiced frustration with China's censorship policies. Yunker says that open criticism could backfire now. "One of the greatest risks to MySpace China is Murdoch himself," Yunker says. "You have to be really tactful in China, you have to be careful not to offend any key officials."
For MySpace, the key to success may be working through local players. That's been the case for Yahoo! (YHOO), one of the U.S. companies gaining traction in China. Yahoo owns 40% of China's Alibaba.com. According to CINNC's May survey of 1,856 shoppers, Alibaba.com's Taobao.com has garnered 67.3% share of consumer-to-consumer purchasing in China.
MySpace.com could join forces with successful Chinese social networking portals like Sohu.com (SOHU), Dudu.com, or Mop.com, says Marlin. Another possible partner: Baidu.com, which in June announced it would launch MySpace-like capabilities—though Baidu stakeholder Google is a competitor to News Corp.
MySpace wouldn't comment for this story or confirm that Wendi Deng is in China. "We cannot comment on private business meetings, company next steps, and future expansion plans, except to say that we plan to have a number of MySpace offices around the world in the coming year," MySpace said in a statement. That echoes comments the company has made previously (see BusinessWeek.com, 8/9/06, "Fox to Make MySpace More Spacious").
Another option: forging an alliance with China Mobile (CHL), the largest Asian telecom company listed on overseas public markets. Some 400 million Chinese own cell phones. That's four times the number who own PCs. Silicon Valley venture capital firm Draper Fisher Jurvetson has invested in mobile social network eFriends Net. "Many of the people in China communicate by phone," Tim Draper, founder of Draper Fisher Jurvetson, said in an e-mail. "Computer use is not as prevalent. I think [MySpace] may lose out to companies who have worked harder on social networks through the cell phone."
MySpace has only recently moved onto mobile phones in the U.S. through features available from wireless service providers Cingular and Helio. Murdoch & Co. could do the reverse in China—or launch MySpace Mobile and MySpace.com there at the same time.
Indeed, to succeed, MySpace China might have to look vastly different from the U.S. version. For instance, short-text messaging (SMS), which is more prevalent in China, could be a key means of communication between users, says Yunker. Videos and music might not play well on low-cost phones and the country's less advanced wireless networks. Ditto for PCs—more than than half of which still use dial-up connections.
Regulatory problems also loom large. The Chinese government polices the content that constituents can access from servers located within China (local server farms typically have to be used so pages can load faster). China also places limits on foreign movies shown inside the country, curtailing the promotional opportunities for ad-supported MySpace. Bottom line: MySpace will have to rely heavily on local content, says Yunker. Fortunately, News Corp. has access to that, thanks to its property Star TV, an Asian television service, as well as a slew of local portals it has acquired over the years.
Forming local partnerships should help MySpace fight an onslaught of local competition, with their typically thinner margins and plenty of venture capital—from within the country and abroad. Brad Greenspan, co-founder of MySpace, was opposed to the site's sale to News Corp. He's now investing in Chinese social networking sites through his new company, BroadWebAsia.com. He's already invested in or partnered with more than 20 Chinese social networking sites, including search outfit BBMao.
In the next 45 days, Greenspan hopes to raise $50 million to $100 million to fund more purchases. "MySpace China is the least of my worries," he says. "There's a lot of competition in China that's more daunting."