1.3 Billion Potential MySpace Friends

If MySpace launches in China, does it make a sound? Well, we can say for sure that this morning's debut of MySpace China is making headlines for all of the right reasons.

  • It was really just a matter of time before the world's largest social-networking site entered the world's largest nation.
  • News Corp. (NYSE: NWS  ) CEO Rupert Murdoch's Chinese-born wife has played a key role in the venture and will sit on its board.
  • A website that thrives on hooking up with "friends" can go batty with the possibilities of a country that's home to more than 1.3 billion people.

Now let me tell you about the reasons why this venture probably won't be a big moneymaker for parent company News Corp. in the near term. 

  • In this morning's Wall Street Journal, the CEO of MySpace China says the Chinese market already has 200-300 social-networking websites and admits that the MySpace brand isn't well known there.
  • Just a tenth of China's population currently has a home-based Internet connection, and the government is cracking down on Internet cafe usage.
  • MySpace's growth has been powered by the open architecture of free-flowing thoughts, racy language, and gaudy customized templates. The leashes are held quite a bit tighter in a restrictive China.
  • Outsiders have had a hard time toppling local favorites. A great example here is with Baidu.com (Nasdaq: BIDU  ) , where Google (Nasdaq: GOOG  ) remains a distant second. Even Microsoft (Nasdaq: MSFT  ) eventually turned to Baidu's popular paid-search program to help sell ads on its own Chinese site.

Punching back
MySpace China's immediate outlook doesn't need to be quite so bleak, though. Keep in mind that MySpace wasn't the first mover in America, either. It watched pioneers like Friendster and Tribe.net rise and fall before it came to dominate the social-networking market. If MySpace China comes in with a better mousetrap, it doesn't matter whether there are hundreds -- or even thousands -- of competing sites. The recent influx of venture capital into this niche will keep a good idea rolling.

What's more, the low Internet penetration rates in China will only improve. It's inevitable. The country's economy is growing too quickly for a roadblock to succeed against the leisurely pursuits that accompany such an explosion. Besides, even with the size and limitations, China still sports the world's second-largest Internet market, behind only the United States.

If you need more nudging on the power of China's market today, consider that more than 1.3 million Chinese residents have played NetEase's (Nasdaq: NTES  ) Fantasy Westward Journey online fantasy game at the same time. This morning's blowout report from Baidu highlights the resiliency of the online-advertising market in China that MySpace is aiming for now.

As for Western companies being a tough import in a country that rallies around hometown heroes, there are exceptions. The success of The9's (Nasdaq: NCTY  ) rollout of World of Warcraft illustrates the country's ability to embrace outside properties. China is also on pace to become the largest Starbucks (Nasdaq SBUX) market outside North America in a couple of years.

Yes, the vigilant ways of China's government may seem to grind against the open nature of social networks, but the competition has already done the hard work of niche validation.

Fine China
Don't get me wrong here. The site is brand new, and we still don't know whether it will bring anything new to the table. It has to if it wants to be compelling enough to make a dent in China's market. The Murdoch name alone won't make it happen.

Nor should the launch of MySpace China be the sole reason to buy into its parent company. News Corp. commands a $24 billion market cap, but it does so for a reason. It is a media giant with leading roles in broadcasting and satellite entertainment. Even if MySpace China is a hit, it's not going to move the needle at an already chunky media empire.

Under the ideal scenario, the social-networking site becomes a hit and serves as a shoehorn for a grander media presence in China for the company. If not, rest assured that News Corp. will cut its losses and back out quietly with a lot less fanfare than you see today.   

NetEase and Baidu are two of the four Chinese stocks that have been recommended in the Rule Breakers growth-stock newsletter service. Starbucks is being sipped in the Motley Fool Stock Advisor research service. Microsoft is an Inside Value pick.

Longtime Fool contributor Rick Munarriz has been following Chinese stocks since 2002. He does not own shares in any of the companies in this story. Rick is also part of theRule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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