Facebook's billion-user drive could hit China's internet wall

The social networking site is proving less popular in North America even as it gains a hold in other highly populated countries. But the biggest nation could be too much to chew

With luck, this is 1997 all over again.

But some fear we are revisiting 2000. The difference is whether the dotcom boom has another three years before the bubble bursts. Investors are buying into internet stocks with a new frenzy but there are signs that consumers are tiring of the current technology.

Evidence emerged last week that Facebook is fading in its original markets. More than 100,000 British users switched off from the social networking site last month, but in its North American heartland the disenchantment was even greater. The number of Canadian users collapsed by 1.52 million or 8 per cent, according to Inside Facebook – a website that monitors the website – while the US customer base collapsed by six million.

That still leaves nearly 150 million US users of the network, but the previous exponential growth is slowing, says Eric Eldon of Inside Facebook. Usage in nations such as Russia and Norway fell too, he says. "Facebook appears to have had fewer monthly active users at the start of June than at the start of May in the US and a few other countries. Canada, the UK and other early-adopting countries have alternatively shown gains and losses starting in 2010. Until then, growth had generally been much steadier."

From its base in Palo Alto, California, Facebook admits the figures are gleaned from its own advertising information but claims this was not designed to track the network's overall growth. However, according to another monitoring source, Compete, not only is Facebook usage falling, but there have also been declines at its Twitter and MySpace rivals too.

Facebook is still growing, picking up customers in developing countries even if it is losing them in the mature markets. Worldwide, it gained 11.8 million new customers last month – more than offsetting its losses – taking its global customer base to 687 million people. But that is less than the 20 million new accounts added each month last year.

However, such a figure represents astronomical growth since Harvard student Mark Zuckerberg and three colleagues developed the network in 2004 for swapping personal details with fellow undergraduates. After opening it to other Ivy League universities, Facebook took off across America, embracing all social classes, then spread internationally. It took four years to reached 100 million users but only five months during 2009 to go from 200 million to 300 million.

Half of Americans now have an account – representing a quarter of Facebook's members – but last month's loss in the US is equivalent to 10 times the population of Boston, where Zuckerman created the phenomenon. If Facebook has many more months like that, it will not only be shrinking at home but users elsewhere may question whether they still want to jump aboard this bandwagon.

Facebook is a private company, with Zuckerman owning a quarter of the shares, but speculation of a flotation has intensified as the price of other internet-based companies has soared. A share offer pencilled in for 2013 is now expected next year by many.

Bill Gates's Microsoft cannily bought a 1.7 per cent stake in Facebook in 2007 for $240m (£150m), implying a $14bn value for the company, but the figure has rocketed since then. Goldman Sachs bought a stake at the start of this year that gave the company a $50bn valuation. Recent share deals on the secondary market put its worth at about $65bn and a flotation could raise that to $100bn, making it bigger than tech stocks such as Hewlett-Packard or Cisco.

Yet Facebook's cashflow turned positive only two years ago and, despite that enormous customer base, it generates revenues of only just over $2bn a year. Its valuation thus compares with the unsustainable prices put on technology, media and telecoms stocks at the end of the 1990s when companies without any earnings were valued on a multiple of sales. Such optimism is evident again now. The $8.5bn that Microsoft bid this year for Skype is 10 times the internet phone company's annual turnover. LinkedIn, another social network, had a $3bn flotation price that is 13 times sales and Renren, a Chinese network listed on the US Nasdaq market, trades at 90 times its annual revenue. Meanwhile Groupon, a discount sales club, is preparing for a flotation later this year that could value it at up to $20bn.

The lesson of the first dotcom boom is that many companies fail to meet their high expectations. Businesses priced with payback periods of two or three decades can fail within two or three years. Google survives, valued at $170bn, as does Amazon at $85bn, eBay at $39bn and Yahoo! with at $20bn, but ventures such as Letsbuyit or Boo.com disappeared when the bubble burst.

AOL's top-of-the-market merger with Time Warner in 2000 was valued at $100bn but the remnants of the business are now worth just a quarter of that. The early networking site Friends Reunited was bought by ITV for £175m in 2005 and sold four years later for £25m after its customers moved to the next generation of providers, including Facebook. MySpace has proved an equally disappointing purchase for Rupert Murdoch: News Corporation paid $580m in 2005 but he was unable to sell it for even $100m this year.

Facebook overtook MySpace in 2008 and claimed more visits that Google last year but customers, especially youngsters, have little loyalty in this sector and have shown themselves immune to the advertising that would generate greater revenues.

Mr Zuckerberg wants to raise his customer base to a billion but his most critical unofficial monitor, Mr Eldon, fears Facebook may be reaching saturation. "By the time Facebook reaches around 50 per cent of the total population in a given country – plus or minus, depending on internet access in that country – growth generally slows to a halt."

So far, Facebook has offset its losses by expanding into large countries such as Brazil – where 10 per cent growth in May lifted its base to 19 million – or Turkey and India, where it has more than 25 million users. Indonesia's 37.9 million customers make it second only to the US.

But to reach a billion, Mr Zuckerman needs to penetrate China's enormous market and that's problematical. Andy Beal, a manager of the Henderson TR Pacific investment trust, says: "It's going to be difficult for Western groups to get in there. The biggest issue for them is the problem Google had in China. The Chinese market is controlled. Beijing does not want a free for all as they had in the Middle East: social networks could lead to all sorts of undesirable coming together of opponents. Western companies can partner with local providers but they'd have to compromise. There is a risk that they will be asked to sign up to measures that are inconsistent with their own values."

Google withdrew rather than agree to controls. But even companies that do enter this market will find competition from local social network groups. Mr Beal invested in Sino.com which has launched the Weibo micro-blogging site. "It's a Twitter clone that went from a standing start to 100 million users in about 18 months," he says. Hong Kong-based Tencent has another 100 million users and Renren claimed 160 millionin February beforeit floated.

And Mr Eldon fears that if Facebook compromises its principles to gain members in China, it could accelerate its losses elsewhere. "China could give it access to hundreds of millions of users and compromise its reputation in the US and many other countries around the world," he warns.

Suggested Topics
News
Jeremy Paxman has admitted he is a 'one-nation Tory' and complained that Newsnight is made by idealistic '13-year-olds' who foolishly think they can 'change the world'.
peopleThe idea has been greeted enthusiastically by the party's MPs
News
Michael Buerk in the I'm A Celebrity jungle 2014
people
Voices
File: David Cameron offers a toast during a State Dinner in his honour March 14, 2012
voicesAnd nobody from Ukip said babies born to migrants should be classed as migrants, says Nigel Farage
Arts and Entertainment
Avatar grossed $2.8bn at the box office after its release in 2009
filmJames Cameron is excited
PROMOTED VIDEO
Arts and Entertainment
Stik on the crane as he completed the mural
art
News
Happy in his hat: Pharrell Williams
people
Arts and Entertainment
Stella Gibson is getting closer to catching her killer
tvReview: It's gripping edge-of-the-seat drama, so a curveball can be forgiven at such a late stage
News
Brazilian football legend Pele pictured in 2011
peopleFans had feared the worst when it was announced the Brazil legand was in a 'special care' unit
News
i100(More than you think)
Sport
Brendan Rodgers seems more stressed than ever before as Liverpool manager
FOOTBALLI like Rodgers as a manager but Liverpool seem to be going backwards not forwards this season
News
ebooksNow available in paperback
News
The Magna Carta
archaeologyContemporary account of historic signing discovered
News
Phyllis Dorothy James on stage during a reading of her book 'Death Comes to Pemberley' last year
peopleJohn Walsh pays tribute to PD James, who died today
Sport
Benjamin Stambouli celebrates his goal for Tottenham last night
FOOTBALL
Life and Style
Dishing it out: the head chef in ‘Ratatouille’
food + drinkShould UK restaurants follow suit?
News
peopleExclusive: Maryum and Hana Ali share their stories of the family man behind the boxing gloves
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Argyll Scott International: Service Desk Analyst

£20000 - £22000 per annum: Argyll Scott International: Service Desk Analyst Re...

Argyll Scott International: 2x Service Desk Analyst

£20000 - £22000 per annum: Argyll Scott International: Service Desk Analyst Re...

Recruitment Genius: Senior Execution Trader

£30000 - £250000 per annum: Recruitment Genius: A global Rolling Spot FX, Comm...

Citifocus Ltd: ACA - Financial Reporting

£Attractive Package: Citifocus Ltd: Chartered accountant (ACA or CPA), must be...

Day In a Page

Homeless Veterans Christmas Appeal: ‘We give them hope. They come to us when no one else can help’

Christmas Appeal

Meet the charity giving homeless veterans hope – and who they turn to when no one else can help
Should doctors and patients learn to plan humane, happier endings rather than trying to prolong life?

Is it always right to try to prolong life?

Most of us would prefer to die in our own beds, with our families beside us. But, as a GP, Margaret McCartney sees too many end their days in a medicalised battle
Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night - is that what it takes for women to get to the top?

What does it take for women to get to the top?

Thomas Cook's outgoing boss Harriet Green got by on four hours sleep a night and told women they had to do more if they wanted to get on
Christmas jumper craze: Inside the UK factory behind this year's multicultural must-have

Knitting pretty: British Christmas Jumpers

Simmy Richman visits Jack Masters, the company behind this year's multicultural must-have
French chefs have launched a campaign to end violence in kitchens - should British restaurants follow suit?

French chefs campaign against bullying

A group of top chefs signed a manifesto against violence in kitchens following the sacking of a chef at a Paris restaurant for scalding his kitchen assistant with a white-hot spoon
Radio 4 to broadcast 10-hour War and Peace on New Year's Day as Controller warns of cuts

Just what you need on a New Year hangover...

Radio 4 to broadcast 10-hour adaptation of War and Peace on first day of 2015
Cuba set to stage its first US musical in 50 years

Cuba to stage first US musical in 50 years

Claire Allfree finds out if the new production of Rent will hit the right note in Havana
Christmas 2014: 10 best educational toys

Learn and play: 10 best educational toys

Of course you want them to have fun, but even better if they can learn at the same time
Paul Scholes column: I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season

Paul Scholes column

I like Brendan Rodgers as a manager but Liverpool seem to be going backwards not forwards this season
Lewis Moody column: Stuart Lancaster has made all the right calls – now England must deliver

Lewis Moody: Lancaster has made all the right calls – now England must deliver

So what must the red-rose do differently? They have to take the points on offer 
Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

Sol Campbell cries foul at Labour's mansion tax

The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

Sarkozy returns

The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
Is the criticism of Ed Miliband a coded form of anti-Semitism?

Is the criticism of Miliband anti-Semitic?

Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

Ouija boards are the must-have festive gift

Simon Usborne explores the appeal - and mysteries - of a century-old parlour game