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Renren Debut Leaves Facebook With Sobering Thought

The stock market debut of Chinese social network Renren will have turned heads at Facebook. The sky-high valuation when shares were priced on Wednesday (at more than 70 times 2010 revenues) conveyed a simple message: investors are hungry for growth. And there is no other growth story with the allure of the Chinese internet.

Chinese students play online computer games at an internet cafe in Hangzhou.
Mark Ralston | AFP | Getty Images
Chinese students play online computer games at an internet cafe in Hangzhou.

For Facebook, which has itself never known anything but outsized growth, this is a sobering thought. Its high penetration among internet users in many established markets is starting to make it reliant on populous, less-developed markets for continued expansion – and they don’t come any bigger than China.

The U.S. company’s service is blocked by China’s Great Firewall. It had already been exploring ways to get a local foothold, and this week’s events have only heightened the urgency. But a move into China also carries great risk. If handled badly it could turn out to be a defining moment for the company — for all the wrong reasons.

At least there is one reliable guidepost to follow: learn from Google’smistakes.

This is partly a question of style. As described by author Steven Levy, in his recent book In the Plex, Google arrived in China in the middle of the last decade with its hubris freshly polished. The search company also chose not to ally itself with a local partner with the heft and the connections to provide cover from hostile bureaucrats and politicians. Through its own missteps, the clever manoeuvring of local rival Baidu and the antagonism of the Chinese authorities, it eventually came to be seen by many Chinese as an arrogant and out-of-touch foreigner.

Mark Zuckerberg shows every sign of having learnt from this, as evidenced by the Mandarin lessons the Facebook chief executive has been taking. And reports (so far unconfirmed) have linked his company with both China Mobile and Baiduas allies to smooth Facebook’s entry.

Of course, this does not address the most vexing questions: Is it right to bow to Chinese censorship in the first place? And, since it hosts a great deal of personal information, would a successful Chinese Facebook become a handy data warehouse for an oppressive regime?

Facebook must be prepared to take the hits that will inevitably come in the court of public opinion. But the reality, for Chinese internet users, is that none of their online information can be deemed to be out of reach of the authorities.

Also, Facebook has at least never confused its goal of connecting people with a moral mission of the “Don’t be evil” kind: it is an agnostic communications platform. It is true that the core values of “sharing” that it espouses rely on a level of openness that does not exist on the Chinese internet. Any compromise will look like a betrayal of this ideal.

Also, its effective use by activists to help organise the revolt in Egypthas left an inconvenient halo around the company.

Moving into China too soon after this would invite a public relations disaster.

Mr Zuckerberg will have to weigh the damage all of this will do to the brand against the long-term risk of being shut out of China. Google ended up with the worst of both worlds. Facebook shows every sign of being ready to take the plunge — putting it alongside many other media and internet companies that believe they can’t afford to stay out.

That leaves two big questions. One is whether a Chinese Facebook should be walled off from the rest of the global social network. Information leakage is a concern: if you have a friend in China, do you really want Beijing to have access to all your personal information – not to mention your connections with other people in China? Options Facebook has studied include various filters to prevent international content from flowing on to its servers in China, and warnings to alert international users about the risks of connecting with people behind the Great Firewall. But none of this would be as clean and bulletproof as just walling China off completely, at least at the start.

The second big question has to do with governance. Should Facebook hand control to a local partner, as Yahoo has done by taking a back seat to Jack Ma of Alibaba? Or should it actively manage the business itself? But with its brand name on the line and long-term aspirations to be a real force in China, Facebook has little option but to put itself in the driving seat. It will not have escaped its notice that Mr Ma has been agitating to buy back Yahoo’s stake in Alibaba.

That means Facebook must engage more directly in China than Yahoo , though with the support of a stronger local ally than Google could count on. Finding a workable — and durable — relationship will be a stretch. But as the Renren debut shows, the time is fast approaching when Facebook will have to jump.