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Overseas growth challenges Facebook

Culture, politics make international future uncertain

Facebook CEO Mark Zuckerberg

AP File Photo

Facebook CEO Mark Zuckerberg.

Few companies have grown as rapidly as Facebook Inc., but with most US Internet users signed up for the social network, its future expansion will have to be overseas. And that won’t be easy.

Last week, Facebook revealed it plans to raise at least $5 billion in a public stock offering this spring, and is reportedly seeking a market value as high as $100 billion. That means the company must convince investors it can continue its dramatic growth.

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In the United States and Canada, six of 10 Internet users are Facebook friends. Although close to 80 percent of its 845 million users reside overseas, Facebook has not been able to crack markets that offer the most potential for growth, including some of the biggest economies in the world.

Fewer than 15 percent of all Internet users in Japan are on Facebook, for example, and the social network has nearly zero penetration in China, where the company has repeatedly said it wants to expand.

That means getting past significant social and political obstacles, analysts said.

“China is, as far as I can tell, pretty much off limits to Facebook,’’ said Rocky Agrawal, a principal analyst at Redesign Mobile in San Francisco. The Chinese government bars its citizens from direct access to Facebook, nudging them instead toward censored, home-grown social networks like Renren and Sina, he said.

Even if China opened the door, its policies could be problematic for Facebook, said Josh Bernoff, senior vice president at Forrester Research in Cambridge. Government agencies in China would probably want not only to censor postings but to have access to personal data posted by Chinese citizens.

“This is people giving up the intimate details of their lives,’’ said Bernoff, and sharing that information with Chinese authorities is “not something that Facebook is ever going to be comfortable with.’’

Other Internet companies have tried to compromise with the Chinese government.

In 2006, Google Inc. agreed to censor its search results in China. But Google ended the agreement in 2010 after hackers, possibly associated with China’s government, attempted to break into its computers and steal information on the country’s citizens.

Facebook did not return calls for comment, but Bernoff predicted it would try to strike up a joint venture with Renren or some other Chinese social networking service. The resulting network would not connect to the global Facebook service but would give the company a foothold in China, he said.

In Japan, on the other hand, Facebook has a cultural problem. Japanese consumers typically surf the Web under pseudonyms. They have had little use for Facebook, which demands that its members be listed by their legal names, Bernoff said.

Without China and Japan, “there are still plenty of places for Facebook to expand,’’ Redesign’s Agrawal said, including India, with 1.2 billion people, and Indonesia, with 233 million. But those countries pose a different challenge. Much of the population can’t afford the products and services needed for Facebook, including broadband Internet access, a personal computer, or a smartphone, Agrawal said.

Facebook is seeking a solution. The company established 0.facebook.com, also known as Facebook Zero, a service for developing countries. It allows users to have access to Facebook through inexpensive entry-level cellphones, without having to buy a costly cellular data plan.

If such strategies work, Facebook could find growth, at least in its user base. But investors will insist it make more money, and so far foreign markets have been much less profitable than its home base. Facebook collected $3.7 billion in revenue last year, almost entirely from online ad sales, but more than half of that money came from the United States and Canada, even though that is where only a fifth of its users live.

Skeptics question whether Facebook is a good buy for advertisers, here or abroad.

John Deighton, a Harvard Business School professor who specializes in online marketing, said he believes Facebook ads don’t work well even in wealthy countries, much less the developing world.

“Most of the money that’s spent on Facebook [advertising] is spent in hope and faith,’’ Deighton said. “The rest of the world is also an experiment, but much less advanced.’’

There is a way for Facebook to better leverage its base in any market, analysts said. It could boost revenues by mining the vast amounts of personal data it collects - everything from what other websites users visit to their favorite books and movies - allowing advertisers to target their messages to the most likely prospective buyers.

But play that card wrong, and Facebook could sabotage its future by alienating users who might feel their privacy is being violated.

Whatever it does, Facebook will need to move quickly. Rivals like Google, which operates the social networks Google+ and Orkut, could capture international users first, Agrawal said. If Facebook does not win hearts and clicks overseas, somebody else will, he said. “Then those people will be off limits forever.’’

The company has one advantage: It knows how to grow.

Founded in a Harvard University dorm room eight years ago, it now has hundreds of millions of users who have made Facebook one of the largest voluntary associations of all time.

“We have never in the history of anything,’’ Deighton said, “except maybe the Christian and Muslim religions, seen anything acquire that many users.’’

Hiawatha Bray can be reached at bray@globe.com.
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