Will Expanding Into China Kill Facebook's Future?

Recently, Facebook CEO Mark Zuckerberg met with Chinese Internet companies Baidu (Nasdaq: BIDU  ) and SINA (Nasdaq: SINA  ) to explore the possibility of a partnership in expanding Facebook into China. With more than 1.3 billion people in the country, expanding into China seems like a great idea for the social-media site and its possible partners, right?

Wrong. Very, very wrong. Here's why.

Censorship up the yin-yang
One of the problems Facebook would face in China is the country's censorship. Both Google (Nasdaq: GOOG  ) and Yahoo! (Nasdaq: YHOO  ) attempted to establish operations in China but pulled out later for exactly this reason. In addition to censorship, Google claims that the emails of "advocates of human rights in China" were routinely hacked by third parties, and Yahoo!'s reputation was damaged when it turned over information on dissidents to authorities.

With a government that routinely spies on, and prosecutes, its citizens for speaking out against the government or its policies, one can't help wondering how a social-media site like Facebook could be used against Chinese citizens, and how this would affect Facebook's reputation.

Negative network effect
Facebook has had such immense success partly because it has created such a positive network effect -- if you know your friends are part of a site, you're more likely to join as well. Before Facebook, there was MySpace, and before MySpace, there was Xanga. Each enjoyed a network effect until people started leaving the site and going to another because it was "cooler."

Now, how cool do you think a social-media site will be if it's found to be the portal through which human-rights violations are occurring? Not very. The problem with a network effect is that once people start leaving, others start leaving, and it turns into a snowball rolling down a hill. With the censorship and possible human-rights violations Facebook would be likely to face by expanding into China, it is entirely possible that users would start to see Facebook in a negative light and begin leaving in favor of a new and "cooler" social-media site.

If Facebook's reputation took a hit and people started leaving, Facebook could quickly go the way of MySpace and Xanga -- yeah, they're still there, but no one really uses them.

One wrong step can kill
With the problems Facebook would face in an authoritarian nation like China, you have to question Zuckerberg's thought process on this one. He's made some great decisions in the past regarding Facebook, as evidenced by its 500 million active users, but is this move worth the risk? And if Facebook expands into China and does poorly, how would that affect the plans to take Facebook public later next year?

Only time will tell, but let's hope Zuckerberg is looking at what happened to Google and Yahoo!, and not letting the lure of 1.3 billion new users lure him into a false step.

Want to keep up with any of the companies named above?

  • Add Baidu to your watchlist.
  • Add SINA to your watchlist.
  • Add Google to your watchlist.
  • Add Yahoo! to your watchlist.

Fool contributor Katie Spence loves connecting over Facebook, but as a previous military member, she would seriously consider leaving Facebook if it does expand into China. She owns no shares of any company mentioned above. The Motley Fool owns shares of Yahoo! and Google. Motley Fool newsletter services have recommended buying shares of Google, SINA, Baidu, and Yahoo!. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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