From Germany to Russia: A Model for Facebook's Worldwide Growth

One of Facebook's most surprising victories to date, offering proof of its viability worldwide, has been its spread eastward through Europe. The expansion began in the west, spreading through the United Kingdom to France, Italy, even the Czech Republic. Many of these markets had their own social networks which, like MySpace in the United States, seemed viable up until months before being passed by Facebook. After becoming the largest network by market share in any given country, Facebook tends to marginalize its competitors -- intentionally or not, its model favors dominance over coexistence. As Facebook became the top network in country after country in Europe, it began to look as if it might do the same worldwide. However, that has not yet happened. A small but extremely significant group of countries could present challenges that Facebook won't be able to overcome. Defining those challenges presents a moving target for forecasters. Germany appeared to be a holdout for over a year, but is today becoming a strong market for Facebook, and the resistance against Facebook has moved further eastward. In October, CEO Mark Zuckerberg named Russia one of four tough countries to penetrate in the coming year (the others were China, Japan and South Korea). But although partially located in Europe, Russia may present unique cultural and geographic barriers, even as central European countries like Poland appear to be joining the exodus to Facebook. Russia Unlike either Germany or Poland, Russia is still holding out against Facebook. Despite high growth in percentage terms, Russia is still a tiny market for Facebook, with only 1.5 percent penetration by the social network. Facebook's two million users look insignificant against Alexa estimates of the size of Russia's two biggest social networks, Vkontakte and Odnoklassniki. While Alexa can sometimes be very wrong, its numbers offer the best guideline, in this case, as both networks significantly exaggerate their respective sizes. Russia is a mix of the German and Polish pros and cons for Facebook: it has its set of competitive social networks, that may help Facebook break in, but a less metropolitan populace than Germany. But it also has its own unique characteristics. Here are a few that could affect Facebook's Russian growth: National pride and desire to use local services Higher levels of geographic and cultural isolation than the rest of Europe Availability of pirated and/or illegal media on Russian social networks Forewarning -- especially given the involvement of investment firm DST Taking these concerns in order, national pride and geographic isolation alone are not enough to block Facebook's growth. Like privacy concerns in the United States or, for that matter, Germany, cultural factors are enough to slow, but not stop, the intrusion of an outside social network. Pirated material is a more serious competitive advantage for Russia's social networks. As Americans should well remember -- the days of easily-accessible pirated material being in the very recent past -- free access to media and entertainment will draw legions of users. Vkontakte, at least, is well known as a haven for such material. There is some hope for Facebook here. Russian networks including both Vkontakte and Mail.ru have come under increased international scrutiny and pressure from copyright holders recently, a fact that could threaten their plans to list on public stock exchanges. Alexey Kostarev, a general producer at Russian game social game publisher i-Jet Media, told us in an interview that he expects rampant copyright violations on Russian social networks to mostly disappear in 2011. That may leave forewarning and the innovation of Russian entrepreneurs as the only permanent barrier to Facebook. We can't predict whether these companies will make the right moves in 2011 to hold their market, but both Odnoklassniki and Mail.ru have a significant ally: DST, the savvy international investment firm that owns both. DST is also one of the biggest shareholders in Facebook, which would seem to justify the firm letting events run their natural course. However, DST will only gain slightly if Facebook wins in Russia. As majority owner of Odnoklassniki, DST would benefit far more if that company were to take the Russian market. Thus, we find it likely that DST will bring its expertise -- and, as a shareholder, insight into Facebook's operating principles -- to bear in helping Odnoklassniki do what western European social networks could not. DST's own view is unclear. CEO Yuri Milner has opined that US internet companies may soon dominate globally "to an extent never seen before", a statement that acknowledges Facebook's successes elsewhere. However, DST only took full ownership of Odnoklassniki in August of 2010 -- the same month that it exited Poland's Nasza Klasa. With its experience across a range of social networks, DST is worth watching as both a friend and potentially foe of Facebook. In the end analysis, no one of these factors is enough to draw a clear picture of whether Facebook can succeed in Russia, so we'll have to wait until 2011 to see whether Facebook's growth in the country continues at its current pace. This article is an excerpt from the full December 2010 Monthly Growth Report, available only through Inside Facebook Gold. Inside Facebook Gold also includes analyst-focused data downloads covering Facebook's traffic and demographic growth around the world. Learn more at Inside Facebook Gold.

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From Germany to Russia: A Model for Facebook's Worldwide Growth

Chris Morrison

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Chris Morrison