By Sherman So and J. Christopher Westland

Editor’s note:
This article has been adapted from Red Wired: China’s Internet Revolution co-authored by Sherman So and J. Christopher Westland. The to-be-published book is aimed at helping readers gain a firsthand understanding of how the Chinese combined successful components from their Western counterparts with innovation, to accommodate the unique characteristics of the Chinese market.

Last week, we talked about the development of video-sharing sites in China – how they changed the Youtube formula to become more successful in the country. This week, we look at another major category of the Web 2.0 sites – social networking.

Chinese entrepreneurs also made their own tweaks to western social networking sites.  Xiaonei and 51.com, the Chinese answers to Facebook and Myspace respectively, realized that merging social networking sites with online games could be a formula for success.

Social networking sites became popular in China in 2005. Two of the most popular are 51.com and Xiaonei. They were the second and the third most popular blogs in China, according to a 2007 survey sponsored by Baidu, the leading search engine. The champion was Tencent’s Qzone, which generated the most traffic among blogs in China.

Beijing-based Xiaonei was founded by students at Tsinghua University and Tingjing University ¹ in December 2005. Entrepreneur Joe Chen bought it in October 2006 and built it into the largest alumni sites for university students in China.

“My first venture was ChinaRen. I sometimes call it the Web 1.0 version of Facebook,” said Chen. He founded ChinaRen, a community site for Chinese university students, together with his MBA Stanford classmates Nick Yang and Zhou Yunfan in 1999.

ChinaRen was then sold to Sohu, the second-largest online portal in China, for $33 million after the Internet bubble burst in 2000. After a brief spell at Sohu, Chen went to the US, where he made an ill-fated effort to start an optical networking company. With the industry reeling from the bubble bursting and the aftermath of the 9/11 terrorist attacks ², his timing could not have been worse.

Chen returned to China to set up another company, Oak Pacific, in November 2002. With the backing of a group of venture capitalists, he tried all kinds of Internet businesses. In 2004, he acquired Mop.com and developed it into an online community focused on entertainment. The next year, he bought DoNews, a tech-blogging site. 
 

¹ They are Wang Xing , Wang Huiwen, Lai Binqiang and Tang Yang.  
² BusinessWeek, “China Web 2.0: Joe Chen Wants it All”, March 21, 2007, Bruce Einhorn.

Xiaonei –China’s Facebook

In 2006, Chen returned to a favorite interest, community sites for university students, by acquiring Xiaonei.

“College life has had a strong influence on me,” he said. “I have always had good intuition about what kind of Internet products appeal to college students. When I saw Facebook, I thought this model would take off. That is why I started doing the same thing.”

Xiaonei’s initial experience was much like Facebook’s. It became popular among students of China’s top universities, and with a lot of promotion, both in cyberspace and on campus, the popularity spread out to embrace the rest of the country’s post-secondary institutions. Chen further extended the coverage to take in high school students and white-collar workers.

His ambition in Web 2.0 got another boost in April 2008 when Japan’s Softbank paid $96 million for a 14 percent stake in his firm, Oak Pacific. Softbank also took out an option that would allow it to raise its stake to 40 percent by investing a further $288 million within a year. At the conclusion of that round of funding, Chen had raised $430 million, much more than the average IPO on Nasdaq. ³    

By 2009, Xiaonei claimed to have 40 million registered members, of whom 22 million were daily visitors.  ⁴

Compared with Facebook, Chen noted some differences in user behavior:

“As digital cameras are less widespread in China than in the US, our users write more blogs and post fewer photos on the site,” said Chen.

More importantly, while Facebook solely depends on advertising for revenue, Chen’s social network site relies on online games.

“In China, online games are huge. Social games and web games can be an important way to generate revenue on our site,” said Chen. “A small percentage of paying users is enough.”

The China difference: Games

Selling virtual items in online games can be a huge business, as many online game companies in China have discovered. Six of the 10 largest Internet companies by revenue operate online games as a major part of their business.

³ From Sina News, Softbank invested $3.84 million in Oak Pacific, April 30, 2008 http://tech.sina.com.cn/i/2008-04-30/11432170841.shtml
⁴ From Xiaonei website, introduction, http://xiaonei.com/info/About.do

Chen acquired web game developer Peagame.com in mid 2008 and planned to buy more. ⁵ “We are also China’s largest web game developer,” he said. 

The surge of popularity in the social networking site Kaixing001.com further convinced Chen that social networking sites that incorporated games were the way to go.

Kaixing001.com was founded by a group of former Sina executives, backed by venture capitalists ⁶. It built up its popularity quickly by including “social” games such as “Friends for Sale” and “Parking War”.

This spurred Chen to start his own competing version called Kaixin.com.

Chen was not alone. Another major social network site in China named 51.com also merged social networking with gaming.

“Besides making money for us, online games can make users stay longer on our site and help our online advertising revenue,” said Pang Shengdong, co-founder of 51.com.

51 – Myspace in China

51.com was started by Zhang Jiangfu in 2003 in Fujian as 10770.com. Pang changed the name after he acquired the site in August 2005 and moved its headquarters to Shanghai.

The Myspace-like website was China’s largest social networking site by user numbers, though its users tended to be less active than Xiaonei’s. As of June 2008, 51.com had over 120 million registered users, of whom 31.5 million logged in at least once a month. ⁷

“While other social networking sites focus on a particular niche, like Xiaonei.com for high school and college kids, and Hainei.com for people with IT backgrounds, we are for general Internet users,” said Pang.

51.com used the charm of beautiful girls to build its popularity. “When 51.com started, it convinced a lot of beautiful girls to put their blogs on the site. This attracted many other users,” said an analyst.

Like Xiaonei, 51.com also attracted many investors. It raised $21 million from venture capital firms Intel Capital, Redpoint, Sequoia and SIG in two rounds of funding in 2006 and 2007. In mid 2008, it raised another $51 million by selling a 25 percent stake to Giant Interactive, a Shanghai-based online game company listed on the New York Stock Exchange.

⁵ Oak Pacific aims to extend online roots with Peagame purchase, 14 Jul 2008, Interfax China, By Chen Shasha
⁶ Investors include Qiming Venture Partners, Northern Light Venture Capital and Ceyuan Ventures. Over $20 million was raised by April 2009. http://www.jlmpacificepoch.com/newsstories?id=145731_0_5_0_M
⁷ From 51 website, company overview http://company.51.com/index_en.php
 

51.com gets its revenue from online advertising and selling virtual items, such as avatars, to its users. Its advertisers include Coca-Cola, Pepsi-Cola, Samsung, Motorola and Kentucky Fried Chicken. 

With the help of Giant Interactive, it is also developing online games. 

“Many online game companies advertise on social networking sites because of their huge traffic and similarity of their user bases,” said a China Internet Research Manager of IDC. “So it is quite natural for social networking sites such as 51.com to develop online games. After all, online games are still the most profitable among all the different Internet businesses.”
 

Table: Top blog and social network sites in China - Rank by traffic

Source: Baidu and Searchlab.com.cn (2007)