What China Can Teach Facebook

facebook has a proven track record of dominating new markets, and it may still prove able to conquer China’s crowded social-networking space if it ever opens up in the country.

But as investors pop the champagne bottles for its IPO, it’s worth taking a moment to consider what the Chinese market can teach the global social-networking leader.

In no small part because Facebook has been blocked in china, the Internet in the middle kingdom hums with competing platforms. Although China rightfully still has a reputation for its wide array of copycat websites, the ferocious competition has brought no small number of innovations.

With traffic quickly migrating from personal computers to mobile devices, all of the big Chinese Internet companies are pushing hard into mobile, but some with more success than others. Though Mark Zuckerberg is well aware of the mobile challenge, he might think about following in Tencent’s footsteps, and instead of working on a more streamlined Facebook app or some grander mobile operating system, make a new mobile product from scratch.

China’s largest internet conglomerate, Tencent, launched a new mobile chat service last year called Weixin.

On top of its mobile chat function, Weixin has integrated audio and photo sharing and other quirky features, one of which allows users to shake their phone and start up a conversation with strangers shaking their phone in the area. According to the Chinese media it’s also testing a new circles feature, that has the uncanny power to automatically categorize friends and contacts based on how a person knows them, and even throws in a few similar strangers for good measure.

Though some in China aren’t sold on the product, more than 100 million users have begun using Weixin since it launched last year.

As Kaifu Lee, former head of China for Google points out, what has set Weixin apart is it has left completely behind the “baggage” of being a PC product.

“Facebook’s client was not inventive from the get go for the mobile experience, it was just aiming for functional compatibility with desktop version. That may on the positive side it will be more friendly to the desktop client, but the downside is it’s not optimized for mobile,” he said.

Another innovation from Tencent that Facebook could consider is getting deeper into games. And beyond that, it might even consider a completely different monetization scheme, virtual products. While most gaming in the U.S. remains based on either a one-time purchase or ads, Tencent has done well by selling virtual products to its users. Mr. Lee points out that while they are sold mostly to gamers, others using its chat services make the purchases also.

“It’s surprising because people would say they wouldn’t pay money for a customizable avatar, but they have clever tricks. You begin with a standard t-shirt and shorts, but then they give you a free upgrade and ask if you want to renew. If yes you pay, if you say no, your shirt disappears, and you might be embarrassed about that,” he said.

And even better from a shareholder perspective, Tencent has been able to ride its massive gaming revenue as it builds out other products. In the first quarter its ad revenue nearly doubled to US$85 million from a year earlier, which was good growth in a tough ad market. But it also offered more than US$1.1 billion and continued growth in gaming revenue. That’s likely to keep the share price up as China goes through that soft advertising period.

Of course Facebook remains the undisputed king of the social network, with or without China for now. As Mr. Lee points out though, the complications of opening a network that allows users to share all kinds of private information in a state obsessed with monitoring that communication poses big problems for any Western company. At the same time, he argues, the window is closing on Facebook to get into the market as Chinese users grow attached to Chinese platforms.

The promise of 500 million internet users notwithstanding, at least Facebook can take a few tips from the parallel internet universe that is China. It might just mean they don’t have to come to China to justify that pile of cash they’re getting.