May 15, 2019 / 3:43 PM / 8 days ago

Breakingviews - Facebook eyes new path around China’s great wall

Facebook founder and CEO Mark Zuckerberg meets Founder and Executive Chairman of Alibaba Group Jack Ma (not pictured), at the China Development Forum in Beijing, China, March 19, 2016. REUTERS/Shu Zhang

SAN FRANCISCO/NEW YORK (Reuters Breakingviews) - Facebook is eyeing an indirect path around China’s great wall. Blocked from operating there directly, the $520 billion social network is considering alternatives that include taking minority stakes in local tech firms, people familiar with the matter have told Breakingviews. Politicians in Beijing and Washington may not like that idea. For Mark Zuckerberg’s firm, though, it’s probably the best option going. 

China is a gaping hole in Facebook’s otherwise-global dominion. Its services were blocked in 2009, shortly after riots in China’s western Xinjiang province, and efforts to get back in have so far fallen flat. The company does earn revenue from agents who represent Chinese advertisers looking to tap the network’s nearly 2.4 billion users, but the People’s Republic shows no signs of letting Facebook in. Setting up a China-friendly network tailored to China’s demands and censorship requirements would certainly create a backlash among U.S. politicians.

Without direct access, one option is to take a page from Yahoo’s playbook. The web portal’s co-founder Jerry Yang invested $1 billion in e-commerce company Alibaba in 2005 for a 40% stake. That didn’t save Yahoo from drifting off into oblivion – its main brand was sold off to Verizon Communications in 2017 for a relatively puny $4.5 billion. But the investment was Yang’s savviest move. The remaining stake in Alibaba, now being disposed of by holding company Altaba, is worth roughly $50 billion based on the share price at Tuesday’s close.

Facebook has discussed potential minority stakes with investment funds and other companies, according to people familiar with the matter, though it is moving slowly and has yet to make any decisions. Zuckerberg would be entering a more competitive market than Yahoo did back in the day, and politicians on both sides might take issue at the idea of Facebook extending its reach into the People’s Republic.

Still, it’s getting harder for Facebook to find growth in markets it already inhabits. The regulatory environment is hostile in its main money-making regions of North America and Europe. As the owner of image-sharing app Instagram and messaging service WhatsApp, future acquisitions will bring tough scrutiny. It’s easy to see why Zuckerberg would want to renew his quest to crack a market of 1.4 billion people, even if it means going in small.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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