Essay on Social networking in China

Introduction

One of the remarkable changes that have taken place in the last two decades is the rapid economic growth of countries such as China, Brazil and India. Their economic expansion has led to a significant shift in economic power from the developed nations who now have to contend with increased competition for markets. However, although their rise presents challenges, there are huge opportunities to be exploited by both countries and industries seeking to improve their trade volumes. Most companies are finding that growth in traditionally lucrative markets such as the United States (US), United Kingdom (UK) and Japan has stagnated due to a combination challenges related to both economics and demographics. Multinationals are therefore looking towards emerging markets for new opportunities for growth and the major ones include Brazil, India, China and South Africa (BRICS).

One industry that stands to benefits from improved economic conditions in developing countries is that of social networking. The industry has gained prominence in the last decade with a good number of companies now coming forward as new platforms for this service. China, by virtue of its high population presents the biggest potential market for this industry yet many of the companies are finding it hard to penetrate it. The problems in the Chinese market are mainly related to government regulations although issues of culture also feature among the challenges faced by social networking companies. Even with the hardships, no company engaged in the business can comfortably stay out of the Chinese market given the big business potential there. Although there are a number of social networking sites in China, it is clear that its full potential has not been exploited owing to the fact that a large social network such as Facebook is yet to fully enter its market. This paper provides an analysis of the industry and its focus will be on the characteristics of the Chinese social networking market as well any advantages or disadvantages of related to the industry's nature and how these affect penetration.

Social media vs. social networking

Emergence of the social networking was one of the hallmarks of the information technology (IT) revolution. Firstly, there was emergence of social media, which covers a wide range of web applications such as blogging, advocacy websites and social networks. The social networks are differentiated from wider social media by three major unique features. According to Boyd & Ellison (2007), social networking sites allow individuals to construct public or semi-public profile, reach out to other users with whom they share some common ideals and view other connections made within the general systems.

Among the most popular social networking sites are Facebook, LinkedIn, MySpace and Orkut. All these sites have one common denominator of bringing people together but differ in their themes with each of them attracting different types of clients. For example, LinkedIn brings people together on account of business and career while Twitter is focused on the real time events. Facebook, on the other hand, which is the largest network, brings together people on social grounds and that is why its users who are sharing information with each other are referred to as "friends". The social networking market is large with Arrington (2009) estmating its total networth at $27 billion. The was an estimation that was done in 2009 and it can therefore be expected that by now its value is worth much more than that given the increasing popularity of this media.

Social networking in China

From the onset, China has always proven to be one of the hard markets to penetrate for any company dealing with products whose success depends on the freedom of information. Google Inc. a Fortune 500 company dealing with information centralization in the internet found it hard to operate in China due to the restrictions placed by the government on movement of information. For that reason, the social networking market is dominated by homegrown companies, which have no problem complying with the stringent censorship regulations required by the government. The country's social networking market statistics are given below:

Name Renren Qzone Pengyou Kaixin001
User-Identity Real-Name Nickname Real Name Real-Name
Registered Users 170m 481m 131m 95m
Active users 95m 190m 80m 40m
Page rank in china #16 #12 #36 #19

Table 1:Mashable statistics for Chinese social networking market 2011

These figures put the total social networking market in China in terms of active users at 405 million. Facebook and Twitter are both not in China owing to the nature of information controls that are in the country, although each of them has an unofficial presence. According to Mangalindan (2011), Facebook tried entering the Chinese market in 2008 when it created a remotely hosted version of the site which was written in the country's native language. The company's stay in China was however short lived because it was shut down a year later in 2009 due to certain events. Since then the company is yet to have an official presence in China, which leaves Renren, its exact equivalent as the predominant force in the country's social networking industry.

The pointer to China's underserved social networking market is given by the fact that in spite of the bans instituted on sites such as Twitter and Facebook, there are still quite a number of users trying to circumvent regulations so as to gain access to them. An example of such a site is facebook.topchina.info/facebook/how-to-access-facebook-in-china/ which was created in July 2009 and has a number of tips on how the site can be accessed. Hence, as much as Facebook is not officially available in China, the site still has loyal fans who are perhaps driven by the fact that the site is not government controlled. Twitter has similar loyal users who despite the current official bans go the extra mile so as to access the site.

Market analysis

Michael Porter's five forces

Porter's five forces will determine the general market characteristics of the social media in China. One unique aspect of the social network and a good number of other players in the internet industry is the ambiguity that surrounds the definition of key stakeholders in the business such as suppliers. However, basic understanding of concepts and definitions around these terms may help demystify these relationships.

Power of suppliers

Traditionally, suppliers have been recognized as parties responsible for supplying a business with components for use in the ordinary course of business although the modern role has evolved to incorporate provision of process management and design (Moser, 2007). In the case of social networks the latter definition makes the supplier position more understandable. A social network's worth is more dependent on its ability to attract users which is in turn dependent on its structure and content available. Given that most of the content is user generated in these sites, it is therefore fair to call a site's users suppliers. The real competition between social networking sites is based on the number of users because they are the ones that enable these companies to get revenues, which are mostly derived from selling advertising space. Lukoff (2011) terms the Chinese internet users as sophisticated, meaning that they are very informed and demanding. The competition for users is high and for that reason, social networks have to ensure that they have the best content, or else users move to competitor networks. The power of users in the case of social networks is high because they can easily switch between them without any costs.

Power of buyers

Social networks are in the market to sell advertising space, which means that those who advertise on it are their buyers. Advertisement for online advertising revenues is not just between social networks but a battle involving all platforms. According to Kiss (2010), for example, Google is experiencing most of its competition from Twitter and Facebook yet these two do not offer the same services to it (Google). There is high competition for online advertising revenues in China but Yannan (2010) notes that there are a good number of multinational companies moving to China due to its rising economic potential. As a result of this, the number of companies competing for online advertising space is bound to rise and hence, the power of buyers is severely reduced in this market.

Power of New entrants

The power of new entrants in this market is extremely low thanks to the restrictions placed by the government. Wang (2008) suggests that the foreign companies will find it almost impossible to compete with local companies because of the strict regulatory environment imposed by the Chinese government coupled with political partronage they enjoy. Apart from government partronage, Syed (2011) cites additional structural factors especially language as impediments to foreign companies entering the Chinese market. That leaves the market to indigenous Chinese companies which means that new entrants may not be that empowered to compete with the established companies in the market. Furthermore, the mention of political patronage means that companies without the right connections or those that fail to conform to the ruling class are unlikely to obtain the necessary authorization or approval to enter the market.

Threat of substitutes

China's internet market has a number of players ranging from blog to search engines and social networks. Blog are particularly popular with the country having over 50 million blogs and 100 million bloggers. Social networks are therefore not the only platform on which users can exchange information Calingaert (2010). Although blogs and social networks differ in the way in their structure, they nevertheless have similarities which can see them acting as subtitutes to each other. Blogs like these social networks are freely available, which means that users can switch between the two forms. However, Ye (2011) points to the user loyalty elicited by social networks. This is sometimes encouraged by the personalized nature of social networks with those requiring users to use real names being the most likely to highest levels of loyalty. With most social networks encouraging users to use their real names it can be expected that the threat of blogs and other forms of social media are greatly reduced.

Degree of rivalry

There are a number of companies operating in the Chinese market but Barboza (2010) notes that the country's online arena is not as competitive as it should be due to government restrictions, which have also led to many American and other Western companies being unable to keep up with their Chinese rivals. Companies such as Facebook and twitter find it hard to compete in this market because they find a business culture that is not consistent with what they are used to in their home markets. Hence, as much as the Chinese internet user is termed as sophisticated it appears that the quality of competition is low.

PESTEL

A PESTEL analysis of the industry's operations in China will be useful in understanding the general business environment in the country without necessarily providing any meaningful knowledge about the competitive forces.

Political Reality

The Chinese government started its match towards a free market economy in the late 1970s, a step which saw government loosen its control over some economic sectors. This move saw the country have a mixed economic system in which part of it became a liberal market while the other remained under tight government control. For the social networks, however, the effect of politics in the information sector has not experienced the kind of transformation experienced in the other sectors of the economy. China remains a single party state in which government controls many political matters affecting its citizens and that explains the reluctance to allow citizens to freely have access to information. According to Harvard International Review (2009), the government's purported goal for preventing access to information is to limit access to harmful content such as pr0nography and gambling yet such content is more easily accessible compared to that touching on issues such as alternative news sources, human rights violations and political groups.

Social networks provide a platform on which people can come and exchange different types of information and although political or social advocacy is not its primary aim, it may become incidental by its very nature. Jones (2011) describes the role of the internet as that of making the world a smaller place in which ideals related to democracy and freedom can easily be advanced. The Chinese government is not very interested in advancing these ideals which explains why it is reluctant to allow information to flow freely. The challenges for the industry even got worse with the alleged role played by social networks in the revolutions that took place in the Middle East. Although all social networks are affected by the tough restrictive appraoch stance taken by the Chinese government, the Western based companies are even more affected due to the deep seated suspicions held by the country's Communist party towards Western governments.

According to Black, although the Chinese people (including students) have a generally favourable view towards the United States, the country's ruling class, which basically refers to the communist party has managed to turn the tide against the country's (United States) and other western based media. The level of political control exercised by the Chinese government over the citizens of that country leaves no room other than conformity for those social networks out to operate there, which in turn greatly limits their potential because most of them thrive on user generated content.

Economic factors

China is one of the world's fastest growing economies and that is one positive aspect of this market. The country's economy has experienced sustained high growth and as a result it has seen its Gross Domestic Product greatly improve. One of the key features of this growth is the increase in size of the country's middle class, which is normally associated with high levels of consumerism. However, the country's economic success is compounded by the twin problems of high inflation and overdependence on exports for growth. According to Patience (2011), the country's economic figures for March showed that the country's inflation had seen a sustained rise since the October of 2010. If the government fails to control this rise, then it is likely to erode consumer purchasing power and also lead to a rise in production costs in the country, which will then lead to the country losing its attractiveness as a manufacturing destination. On the overall, this will have adverse effects on China's economic outlook and affect its export led growth model.

China's economic rise is perhaps one of the biggest attractions for any social networking company. A good measure of the economic potential of a social networking market is through an examination of its advertising revenues because all the major companies offering these services do not charge their users for membership but are rather dependent on corporates that buy advertising space. Renren, which is China's largest social network company, according to Womack & Saitto (2011), has been doubling its advertising revenues since 2008 when it first started to sell advertising space. Although this may not give the value of the advertising market in absolute figures, it does give a pointer to the untapped potential, something that can be attributed to the strict regulations that have been placed on information exchange by the government.

Social factors

China has seen significant social transformations since the reforms that started in 1978. According to Shoulong (2011), the significant change is that the Chinese society is becoming more open and that individuals and families are now independent economic actors. This change focuses more on the liberalism that is becoming a central feature of the Chinese society although it must be noted that it does not mean freedom from government control. The communist government continues to exercise a lot of control over its people, meaning that the implementation of free market ideals is limited to certain sectors.

The general demographics of China are favourable in terms of social networking with Barboza (2011) pointing to the country's huge internet population being made up largely of young people, most of who spend most of their time in social networks and other online activities. Also, the country has over 50 million bloggers and 100 million blogs Calingaert (2010). It is worth noting that the country has not banned or imposed strict censorship on blogging as it has for social media and that explains the large of number of blogs. That explains the important role blogs play in providing the Chinese people with a medium of socialization, whose information flow is least restricted by the state. It is clear from this that the Chinese have a high regard for online social interactions but the only impediment is the country's political situation. The country's largest social networking site Renren is valued at $7 billion and has over 170 million users (Barboza, 2011).

Technological factors

Social networks need higher level communication infrastructure and specifically this means medium to high speed internet connection and convinient access points for users. Lee (2009) suggests that China still falls behind other developing countries in terms of broadband internet access with regards to speeds but also notes that a good majority of over 90% of the country's internet users can browse using their mobile phones. This implies that although the country may not be at the level of countries such as Korea and Japan on internet speeds, the kind of speeds available are still sufficient for people to acess various websites. Also, the availability of internet on mobile phones means that people are able to acess the internet more often which in turn increases traffic to these and other sites. Ultimately, although China may not be in the same level of development as that of highly developed nations, it has sufficient technology that ensures that citizens in need of internet access are able to browse.

Environmental factors

Social networks have less to worry when it comes to environmental issues because of their nature as service industries, which means that their operations are unlikely to pose any significant problems to the environment. The only problem is that environmental pollution is a big issue in China and this has prompted the Chinese government to set high targets of energy consumption to be covered by renewable energy. This may not impact on companies because they will incur extra overheads related to compliance; for example, a company will incur extra expenses if they have to install energy generators for solar and wind energy so as to run servers.

Legal factors

China's laws do not prohibit the act of social networking and hence all companies in this sector have no legal barriers especially with regard to setting up their operations (Barboza, 2011). Both Facebook and Twitter have operated in the country before and only had their operations terminated due to occurrence of certain events. China, according to Doria (2011) is a signatory to the International Covenant on Civil and Political Rights (ICCPR), which obligates the communist government to provide certain rights to its citizens and that explains why the country does not have explicit laws prohibiting the act of people coming together to share information. However, the government hides behind reasons such ensuring that the country's internet users have no access to inappropriate content such as pr0nography to muzzle information flow. Companies such as Facebook and Twitter find it hard to operate in this kind of environment because they find that they have to compromise their founding prinicples or upset some of their users. On the other hand, Chinese homegrown networks such as Renren have been successful because they are able to follow the conditions set out by the government because most of their users are made up of the local Chinese population who do not have much of a choice but to comply with laws.

SWOT analysis

SWOT analysis is a study of the industry's internal and external factors that contribute to its strengths and weaknesses. This type of analysis will assist the company explore how to take advantage of its strengths and at the same time try to minimize on the adverse effects of its weaknesses.

Internal factors (strengths and weaknesses)

Strengths

The greatest strength is that of having a large number of internet users who Barboza (2011) suggests that they spend most of their time on the online going through social networks is an indication of the time spent on these sites. That means that if a social network can meet user expectations then it is likely to have more traffic, which translate to higher advertising revenues.

Weaknesses

The greatest weakness faced by social networks is the subjection of its main commodity which is information to strict political and legal regulation. Although a number of companies have managed to cope with the government's requirements, it is clear that the industry's level of service is still below par. That means that China's social networking market has poor service quality making it vulnerable to subtitutes such as blogs existing in the market.

External factors (opportunities and threats)

Opportunities

The country's high economic growth and high population presents the greatest opportunities for social networks. Unlike, the Western and North American market, the Chinese market is poised to grow as more and more people gain access to the internet. Also poised to grow is the amount of online advertising revenue in the market as more multinationals seek to enter the lucrative Chinese market.

Threats

The biggest threat is that of government regulation. Some companies such as Facebook and Twitter have found the regulatory environment too tough and as a result exited the market notwithstanding the fact this is one of the most lucrative markets for companies in this sector. The industry's potential is greatly limited by the presence of these regulations because each company has to ensure that its product offering conforms to government requirements. Wang, (2008) notes that companies invest heavily ensuring that contents in their sites are not politically sensitive. Also, the type of censorship need for the Chinese market has to be updated from time to time due to its dynamic nature. All these pose both operational and financial challenges.

Swot matrix

Players in the industry can formulate strategies using the SWOT matrix.

O-S strategies

O-S strategies, according to ACCA (2011) include market penetration, product development and diversification. There is great growth potential due to the country's high population and low internet penetration. Companies in the industry can focus on developing products that meet customer expectations and at the same time conform to government requirements.

T-S strategies

Here, the company can use its strengths to deal with external threats. This includes product differentiation, niche marketing and cost leadership. The threat posed by government's stringent censorship regulations can be reduced by focusing on a niche market that is unlikely to contravene information control laws. A social network can focus on a market such as children upbringing so that mothers register on the site to share information on that subject. This is unlikely to attract any official sanctions because government is unlikely to be bothered by people coming together to share information on how to bring up their children.

O-W strengths

Companies in the industry can also minimize their weaknesses so as to take advantage of existing market opportunities. Strategies may include mergers, joint ventures and franchising. A good example of this is shown by the speculations by Kan (2011) that Facebook was in China to discuss a possible merger with Baidu, the country's largest search engine. That will enable Facebook to make use of Baidu's market presence and knowledge to explore opportunities present in the Chinese market.

W-T

This is a strategy for a company that finds too many threats and internal weaknesses. Such companies may choose to withdraw, divest or liquidate. Networks such as Twitter and Facebook faced these challenges and were forced to withdraw from the market.

Conclusion

The social network embodies one of the underlying concepts of the internet which is to create a global village by bringing people together regardless of distance. However, as with other forms of information transfer it has not received enthusiastic support from all quarters with China being an example. Social networks in this case have to strike a balance between meeting their users' expectation and complying with government regulations. Many a good number of companies such as Facebook and Twitter could not strike a balance when it came to China while other networks such as Renren had no problems fully complying with government regulations. Fully ignoring the Chinese market looks impossible at the moment given the economic potential. The best strategies for companies out to take advantage of this market are contained in the SWOT matrix. There is no doubt that each company has its strong and weak points and if carefully balanced the two attributes could end up providing operational advantages. In particular, the study of the market using Michael Porter's five forces showed that this is a lucrative market with the buyers being the only stakeholders with a high bargaining power. It is also clear that companies that are able to go past the regulatory hurdles will face little competition, which means that they are likely penetrate the market easily.

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