Monday, July 25, 2011

Emerging-market Social Networks Defend Their Turf

Social networks have been dominating technology industry headlines in recent weeks.  LinkedIn's red-hot initial public offering in May intensified speculation as to when Facebook (which recently hit 750 million users) will go public and allow a closer look at its finances. New entrants are stirring up the space as well. The strong start for Google+ indicates that while Facebook is the unquestioned market leader, there is plenty of room for innovation.

While Facebook is being challenged in its home market, it is also facing stiff competition in a number of important emerging markets, such as China (Tencent) and Russia (V Kontakte and Odnoklassniki). In some cases, cultural and political factors can influence the success of social networks. The Iranian government's limiting of access to Google's Orkut and censorship efforts against Twitter and Facebook have allowed local networks, such as Cloob, to spring up and fill the market opportunity.  Yet in other countries, the need for competitive advantage and the hunt for elusive profitability have led to innovations that keep consumers loyal to local brands. China's Tencent QQ instant messaging service allows users to buy "Q coins" at 1 Q coin per RMB, which allow users to buy virtual goods including items for games or accessories for a user's avatar.  This is similar to the Facebook Credits payment system. As Tencent's earnings show, catering to the Chinese consumer culture of playing games and charging them for virtual goods has led to a huge payoff. By facilitating the purchase of digital goods, these networks can spark an entire industry of games and applications that bring in additional revenue.  

Multinational firms doing business in these markets can benefit by paying attention to trends in the social networking space, given the sector's status as a bellwether for consumer technology tastes and preferences. Capitalizing on these trends requires paying attention to social and political factors, finding a way to capture revenue from innovative revenue models and building software with local device capabilities in mind (many emerging-market consumers access social networking sites through their mobile devices, for example). By engaging social network users, firms can not only gain an in-depth understanding of their client's tastes and preferences, they can add potentially lucrative new sales and marketing channels as well.