October 20, 2008

MySpace China Looks for Answers After Setback

Rupert Murdoch hasn't enjoyed much success in China. Quotas on foreign films hinder the efforts of Murdoch's Twentieth Century Fox to make inroads in Chinese cinemas. Government control of the TV industry has largely keptNews Corp. [ticker: NWS.A) subsidiary Star TV, the Hong Kong-based Asia satellite TV operator, on the sidelines of the world's largest country. And rampant piracy and illegal Internet downloading mean News Corp. can do little to cash in on the popularity of shows such as Prison Break.

That's why expectations were so high for the launch of MySpace in China. Unlike the movie and TV industries, the Chinese Internet business is open to foreign investment. China has the world's largest online population, with more than 250 million using the Net; many of them are students or people in their 20s, prime users of MySpace in other countries. Murdoch's wife, Wendi, was born and grew up in China and took an active role in launching a local version of News Corp,'s social networking service [SNS], MySpace.cn, [BusinessWeek, 6/26/07] in the country in April 2007.

Murdoch's bad China luck isn't changing, though. MySpace China, a joint venture among News Corp., venture capital firm IDG-Accel [a partnership between Boston-based IDG and Accel Partners from Silicon Valley], and local investment firm China Broadband Capital Partners, doesn't have much to show for its effort. "MySpace.cn has not become a Tier 1 SNS site in China," said Beijing-based market researcher BDA China in an August report. The company is an also-ran in the Chinese SNS scene, dominated by local names such as Qzone, Xiaonei, and 51.com, and was hit last month by reports in the local and international media of a management shakeup, including the departure of Luo Chuan, who had left Microsoft (MSFT) China to be MySpace China's CEO.

Rethinking the Business Model While denying Luo has departed, an executive at one of MySpace China's shareholders confirms that some major changes are in store. Zhou Quan, managing director and general partner at IDG Accel, which owns 10% of MySpace China, says executives are in the midst of rethinking the business model. Luo, he says, continues to work at MySpace China "almost full-time" and is taking an active role in discussions regarding the company's future direction. "There will be a total plan, not just a change in CEO," says Zhou. "They will come up with a new strategy."

Other people involved with MySpace China declined to comment. China Broadband did not respond to requests for an interview. A U.S.-based spokesman for MySpace referred questions from BusinessWeek to the China operation. "We are not in a position to comment on the reports regarding our CEO," said MySpace China spokesman Yitian Zou in an e-mail. "The company and business are doing well."

There's certainly a big gap between MySpace China and its Chinese rivals, though. According to BDA, MySpace China hopes to have 10 million registered users by the end of the year. In contrast, market leader Qzone, owned by Shenzhen-based instant-messaging giant Tencent Holdings, already has 105 million registered users. Another Chinese SNS operator, 51.com, has 95 million.

An Eroding Advantage When it entered the market, MySpace China could count on a cash advantage thanks to its deep-pocketed owners, but that edge is eroding because of big investments in local SNS operators. In July, for instance, Giant Interactive Group (GA), a Shanghai online game operator, announced plans to invest $51 million in a 25% stake in 51.com. In April, Japanese Internet power Softbank led a group of investors that paid $430 million for a 35% stake in Beijing-based Oak Pacific Interactive, which operates Xiaonei, an SNS site that resembles Facebook and focuses on China's student population.

As the local players become stronger, some in the industry are dismissive of MySpace China and its high-powered backers as paper tigers. "Everybody knows it's a U.S. brand," says Brad Greenspan, former CEO of eUniverse, where MySpace got launched, and now chairman of BroadWebAsia, a West Hollywood [Calif.] investor in Chinese Internet sites. "If you want to spend time on a site that's about you, it's harder to pull that off with a U.S. brand. It just doesn't feel authentic." In China, SNS "is entirely a local game," boasts Joseph Chen [personid=7924927], chief executive of Xiaonei owner OPI. Not only are Chinese users reluctant to switch to a newcomer but many young Chinese students without strong English skills don't even know how to spell the name MySpace. "You tell a typical kid in China who has never heard about MySpace and ask the person to spell it, 90% of the time the kid has no clue," says Chen.

Such criticism is not merited, argues IDG-Accel's Zhou. The MySpace China business "is on track," he says. Zhou also points out other SNS operators aren't having an easy time of it, either, as they continue to struggle to find a business model that works. "Even in the U.S., Facebook and MySpace are still trying to figure out how they can monetize their social resources," he says. "MySpace in China is thinking of a new way to do that." According to Zhou, the company expects to have answers about what that new way will be soon.