Why Facebook Skype Is Not a Bad Idea

As Facebook evolves into a communications business, combining with Skype makes great sense. But why would Skype sell out?

Did you hear that both Google and Facebook are looking either to partner with Skype or simply to buy it? Funny, because back in the days when Skype was in play (before it was acquired by EBay), Google had a chance to buy it, but Larry Page and Sergey Brin nixed the idea.

Today some are speculating that Facebook might be a better suitor than Google, though I bet none of the sources quoted in the Reuters story has any first-hand knowledge of any deal. Reuters pegs the price of Skype at $3 billion to $4 billion, roughly three to four times Skype's annual revenue, which is in the $1 billion range.

People laughed at me when I suggested back on Sept. 29, 2010, that Facebook should buy Skype. Here's what I wrote then, and I still think that is the real reason for a Skype-Facebook deal:

"Sure, this would be a big, hairy merger, but look at it this way: In one swoop, Facebook would dominate what I've maintained is both the new age and classic social networking. They have people's credit cards; they have their real-world phone information; and in the end, they have a better, more useful, social graph than Facebook itself.

The Skype-Facebook client on the desktop would mean both Facebook and Skype will be jointly in people's faces and take time away from other Web services, such as Google. A simple search box inside the Skype client, and the two companies are starting to take attention away from archnemesis Google."

FROM NETWORK TO COMMUNICATIONS

Since then, Skype is much bigger, has more revenue, and has a lousy new desktop client. Facebook has taken huge strides toward owning "communications" and online "interactions."

When Facebook launched its Social Inbox, I pointed out:

"For the first three years of its life, the company was merely a social network, but then it transformed itself in quick succession into a social Web platform and then a social aggregator of the Web. Today the company launched its 'social inbox,' a new kind of messaging system that is the first public manifestation of the new new Facebook. Facebook's newest core competency is communications—a way to become even more indispensable in our daily Web lives."

There are many other reasons why this deal makes sense, the biggest being Marc Andreessen, the Web wunderkind turned über-VC who sits on the board of Facebook and has investments in both companies. It would be Christmas in summer for his fund if this deal goes through.

IS SKYPE CRAZY TO SELL OUT?

What isn't clear to me is why Skype wants to sell. Sure, everything has a price, but boy, if there's one company that can go public, it's Skype. Frankly I am surprised that Skype would settle for such a low number. Why sell for four times its revenue? Is there something that doesn't meet the eye? Has the juggernaut slowed? Six months ago, I suggested that Facebook should pay $7 billion to $7.5 billion.

I'm even more surprised that Skype wouldn't shoot for a public offering—which is crazy, because it is precisely the kind of company that can go public.

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Facebook CEO buys a $7 million house

Facebook CEO Mark Zuckerberg has purchased a new 5,617 square foot house in Palo Alto. Public records show the property in question sold in mid-March for $7,000,000. Here’s a description of the place, courtesy ofReal Estalker:

The turn-of-the-century residence, set well back from the street behind walls and privacy hedges, was originally built in 1903 and remodeled and expanded over the years. The previous owners–who reportedly still occupy the home as of yesterday–gave the property a complete and expensive overhaul a few years ago that included the addition of an entertainment pavilion with outdoor fireplace and built-in barbecue and a lap-lane salt water swimming pool and spa.

A wide rocking chair porch leads to and impress-the-guests entrance hall and reception area, a formal living with fireplace, banquet hall sized dining room, wood-paneled family room with built-in cabinetry and a large center-island kitchen that opens into a glassed-in sun porch. The master bedroom includes a bathroom with twin Carrera marble topped vanities, separate soaking tub and shower and heated floors for tootsie warming on those chilly and damp NorCal mornings.

The house features a saltwater pool, a music alcove, five bedrooms, five full and two half bathrooms, a glassed-in sunroom, and a spacious porch. It is also a convenient 10-minute drive away from the company’s soon-to-be headquarters, according to Mercury News. As a reminder, Facebook’s headquarters are currently in Palo Alto, California, but will be moved to Menlo Park, California, in June 2011.

Although he isn’t expected to move in for several months, it’s almost fitting that Zuckerberg is also settling down. Long after becoming a billionaire, Zuckerberg still rented modest places to live (and claimed to have found all of them on Craigslist), but now the young man finally become a first-time homeowner. The company’s CEO has lived in Palo Alto almost the whole time since he moved Facebook from his Harvard dorm room to Silicon Valley back in 2004.

I normally couldn’t care less about what celebrities are doing, but Zuckerberg happens to be mildly relevant to to the future of Facebook. I’m just wondering: did the 26-year-old pay in cash?

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Facebook of China' walks a fine line

Imagine buying shares in a company that could be closed down overnight. That is in some ways what Renren, dubbed the Facebook of China, asked investors to do.

This week, investors complied: Renren raised $US743.4 million ($696 million) in an initial public offering and its shares jumped 29 per cent on their first day of trading on the New York Stock Exchange.

But Renren's operations, which include social networking, gaming and online commerce, walk a thin line of compliance with strict Chinese regulations around freedom of information - and if they cross the line, the consequences could be very severe.

"People at any social network in China that is going to be successful are going to be very sensitive to playing the game by the rules." said Dixon Doll, co-founder and general partner of venture capital firm DCM, which is an investor in Renren.

"You're going to have to pay attention to the will of the Chinese government because they are going to... keep a very close look on the kinds of activities that go on."

China's rules for sharing information online have become stricter since authoritarian regimes across North Africa and the Middle East have been toppled or challenged by protesters.

The Communist Party leadership is determined to stamp out even the hint of such protests immediately. It learned a harsh lesson in 1989 when mass demonstrations threatened its control and triggered a bloody military crackdown in Tiananmen Square.

"They may regard (Renren) as a friendly enterprise, but if an enterprise turns unfriendly, I think they would cut the cord," said Donald Straszheim, senior managing director of China Research at International Strategy & Investment Group.

China has already blocked social networking sites Twitter, Flickr, Facebook and YouTube, while Google Inc essentially pulled out of China in 2010 after run-ins with the government over censorship and hacking.

The government routinely shuts sites down or more commonly blocks content it sees as a security risk - and recently, Chinese President Hu Jintao called for yet more oversight and "mechanisms to guide online public opinion."

But Beijing is also seeing social media as a valuable gauge of public sentiment and a way to show the Chinese it is sensitive to what they want, said Michal Meidan, a China analyst at political risk consultancy Eurasia Group.

In this peculiar environment, China-bred Internet ventures have adapted, learning to skillfully navigate the system.

In the case of a company like Renren that means blocking whatever you are told to block by the authorities and also by self censoring, which means reading the political winds so that you block other material you fear could be controversial.

"It's a constant game of cat and mouse," Meidan said.
Renren itself acknowledges the tenuousness of its position in the risk factors section of its IPO prospectus. While these disclosures are notorious for listing the most extreme risks, in this case they may well be worth a closer reading.

The company says it is prohibited from allowing content that, among other things, "impairs the national dignity of China," is "superstitious" or "socially destabilising."

If Renren fails to comply, which would be determined by the authorities, the company says its business could be shut down.

In the cases of more serious, or "material" violations, the penalties could include "a revocation of our operating licenses or a suspension or shutdown of our online operations, which would materially and adversely affect our business, results of operations and reputation," Renren said.

The social networking company said it is liable for all material posted on its websites, from advertisements - some of which must be vetted by government officials before being posted - to individual communications between users.

With that much responsibility, Renren said it may not always know what content could cause problems and may only find out about the violation after it has already happened.
Renren's structure also presents problems.

For example, the fact that Renren is incorporated in the Cayman Islands puts it in danger of being subject to new limitations if foreign investment rules or their interpretation change. Renren's online gaming operations, which provided 45 per cent of the company's 2010 revenue, also could be affected by Beijing's efforts to curb gaming addiction in minors.

All told, Renren used variations of the word "uncertain" nearly 70 times in its prospectus, and the word, "regulation", nearly 300 times. By way of comparison, US Internet phone services provider, Skype, used "uncertain" about 60 times in its prospectus, but only used "regulation" about 170 times.

Reading tea leaves

Many risks lie in the uncertain and changing nature of China's Internet laws, which Renren said are enforced and interpreted in an "evolving" way, often are not published on a timely basis - or at all - and may be applied retroactively.

The Chinese government has been wary of online content that stirs up the population for some time.

In 2007, Chinese government officials struggled with what to do with China Central Television anchor Rui Chenggang's blog call for the Forbidden City Palace Museum to evict Starbucks. It drew half a million signatures to an online petition and dozens of domestic newspaper articles, according to a February 2007 diplomatic cable sent from the U.S. embassy in Beijing.

The post was patriotic, but also showed just how a massive protest movement might emerge in the world's biggest Internet market, according to the cable, which was obtained by Wikileaks and provided to Reuters by a third party.

"Blog content that spurs extremist passions is precisely the kind of material the Government would like to control," according to an executive at a Chinese Internet company, cited in the cable.

"The paramount concern (is) that a mass movement might emerge, born on blogs or through another electronic medium, to reduce the Government's maneuvering room on a sensitive issue, or challenge Party authority," according to that person.

Since that time, though, Beijing has radically stepped up its online information control.
It put a ban on postings containing the word "Egypt" as protesters in Egypt demanded and finally succeeded in bringing down the Mubarak government.

The level of paranoia increased even more when an overseas Chinese-language website, Boxun, made an online call for gatherings at various places around the country. Police were sent out and detained and beat foreign journalists who went to see if there were protests in downtown Beijing and Shanghai.

After then US ambassador Jon Huntsman was seen in a crowd at one of the pro-democracy gatherings in Beijing, censors also cracked down on microblog searches for his Chinese name. They have also blocked searches for "jasmine," "jasmine revolution" and "Hillary Clinton" on popular websites.

Fear of losing control

So far, China's rapid economic growth has outpaced its political problems, bringing many people from poverty into the middle classes. It has also ironically allowed China's security apparatus to get all the funds it needs for surveillance.

Despite concerns about inflation and corruption - which both helped to trigger the Tiananmen protests - few think China's rulers are in any danger of being threatened like the leaders in North Africa and the Middle East.

But there have been protests and strikes, and the authorities fear that if the nation's economic growth were to slow significantly, unrest could bubble up. As social media-powered protests elsewhere have proven, websites like Renren could find themselves in the middle of a perfect storm.

"I don't think there's a threat in China of anything comparable to the Middle East," but the fear of mass-mobilisation is enough to create a sense of urgency around social media, said China political risk analyst Meidan.

"Ahead of the political leadership transition in 2012, it's going to remain very, very volatile," she said, referring to the expected power handover from President Hu.

Renren's self censorship should be enough to protect it under normal circumstances but if the Chinese leadership felt really threatened the story might be very different.

One of Renren's biggest appeals for US investors is its access to the biggest Internet user base in the world in a country that has put up walls to major global competitors.

But, that's exactly what might be Renren's Achilles' heel. If a government can't accommodate the Googles of this world then what will happen to the local equivalent if it is implicated, even if unwittingly, in a major political eruption?


Read more: http://www.smh.com.au/business/world-business/facebook-of-china-walks-a-fine-line-20110507-1ecvh.html#ixzz1LewoFpuU

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Renren Seeks Double Facebook’s Valuation for China Social-Networking IPO

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April 18 (Bloomberg) -- Duncan Clark, chairman of BDA China Ltd., talks about social networking in China. Clark also discusses Facebook Inc. and Renren Inc.'s U.S. trading debut. He speaks with Emily Chang on Bloombeg Television's "Bloomberg West." (Source: Bloomberg)

Renren Inc., China’s biggest social- networking website by page views, is seeking a valuation more than double that of Facebook Inc. as it aims to raise as much as $743.4 million in a U.S. initial public offering today.

The Beijing-based company is offering 53.1 million American depositary receipts for $12 to $14 each, according to a filing with the U.S. Securities and Exchange Commission. At the midpoint, Renren would trade at 67 times last year’s sales, compared with 25 times for Facebook as valued by Goldman Sachs Group Inc.’s investment in the U.S. company.

Renren is demanding a premium, with China’s economy projected to grow three times faster than the U.S. and about two-thirds of the population not yet online. The company, which also offers games and daily deals for consumers, plans to use the proceeds from the IPO to expand as it faces competition for advertisers and users from local Internet companies Sina Corp. and Tencent Holdings Ltd. (TCEHY)

“You can say it’s overvalued, but people are going to buy it anyway,” said Darren Fabric, a Chicago-based managing director at IPOX Capital Management LLC, which oversees about $2.5 billion and invests in IPOs. “The growth is there, and you’re paying for it big-time.”

Renren and at least 17 other companies worldwide are attempting to raise at least $2.5 billion in IPOs this week, according to data compiled by Bloomberg. In the U.S., April had the most new filings for initial offerings since August 2007, Renaissance Capital LLC, based in Greenwich,Connecticut, said last week.

More Visitors

At least three Chinese Internet companies announced IPO plans last month as Youku.com Inc. (YOKU), the Beijing-based online- video site, trades at more than 100 times 2010 sales following its December IPO.

“We’re at least in exuberant territory, if not a bubble, with Chinese Internet stocks,” said Michael Yoshikami, who oversees $1.1 billion as chief investment strategist at YCMNet Advisors in Walnut Creek, California. “Investors need to be very aware that if the company doesn’t execute on these lofty expectations, they are in for a rude awakening.”

After its offering and a concurrent private placement to investors, Renren may have a market value of $5.1 billion, based on the $13 midpoint of the offering range.

Renren Users

Renren, whose name means “everyone” in Chinese, had 117 million users as of March 31, less than a quarter of the more than 500 million users Facebook has globally. The company boosted the maximum sought in its IPO by 27 percent on April 29.

Facebook, which is banned in China, said in January it had a market valuation of $50 billion after raising $1.5 billion from investors including Goldman Sachs and Russia’s Digital Sky Technologies. The Palo Alto, California-based company may have reached about $2 billion in revenue last year, three people with knowledge of the matter said in December.

Some Chinese Internet stocks may have “high valuation risks,” said Kai-Fu Lee, a former Google Inc. executive whose Beijing-based venture fund invests in startups, in an April 15 interview on Bloomberg Television.

Valuation Risks

Qihoo 360 Technology Co., the Beijing-based provider of computer anti-virus products and Web browsers, has almost doubled in value to 56 times last year’s sales since its March 29 IPO, when it raised $175.6 million. Youku.com, which has booked combined net losses of 681 million yuan ($105 million) since 2007, has more than quadrupled in value since its Dec. 7 IPO, Bloomberg data show.

Softbank Corp., Japan’s third-largest wireless carrier, owns about 40 percent of Renren and isn’t offering shares in the sale, according to the prospectus. Renren founder Joseph Chen, who is also the chairman and chief executive officer, will sell 13 million shares to trim his stake to 23 percent from 28 percent. General Atlantic LLC, based in Greenwich, Connecticut, and DCM, theMenlo Park, California-based venture capital fund, own stakes in Renren as well.

General Atlantic is also an owner of SouFun Holdings Ltd. (SFUN), the operator of China’s biggest real-estate website, whose ADRs have more than doubled on the New York Stock Exchange after its $125 million IPO in September. DCM is an owner of E-Commerce China Dangdang Inc., the country’s biggest online book retailer, whose stock is 42 percent above the Beijing-based company’s IPO price after a Dec. 7 share sale.

‘So Much Hype’

Wang Yi, director of public relations at Renren in Beijing, declined to comment on the pricing.Morgan Stanley (MS), Deutsche Bank AG (DBK) and Credit Suisse Group AG (CSGN) are leading the offering. The ADRs will begin trading on the NYSE tomorrow under the symbol RENN.

China had 457 million Internet users at the end of 2010, and about half of them used social-networking websites, compared with a total population of 1.33 billion in 2009, according to datafrom the government-sponsored China Internet Network Information Center. The Asian country’s economy will grow 9.6 percent this year, versus 2.8 percent for the U.S., according to estimates from the Washington-based International Monetary Fund.

“Renren is really sitting at the intersection of those two trends, which is why there’s been so much hype about it,” said Nick Einhorn, an analyst at Renaissance Capital. “Whether investors think all of those companies are overvalued is certainly something you could argue for, but given where Youku and Qihoo are trading, it’s not unreasonable to expect Renren to get the same kind of valuation.”

Growing Faster

Besides its social network, Renren operates a group-buying site that offers daily deals on local services and cultural events, Nuomi.com, and an online games site. In 2006, Renren acquired Xiaonei.com, a social networking site founded by graduates of Beijing’s Tsinghua University in 2005. Renren, formerly known as Oak Pacific Interactive, began operations in 2002, according to the IPO prospectus.

“The world has never seen the kind of growth we’re seeing out of Internet companies in China,” said Lou Kerner, a social media analyst at Wedbush Securities Inc. in New York.

Renren will be the first social-networking site to go public in the U.S. LinkedIn Corp., based inMountain View, California, filed for a $175 million IPO earlier this year and has yet to release terms for the share sale.

Boingo, Thermon

In other IPO news, Boingo Wireless Inc., an operator of wireless Internet hotspots, is attempting to raise as much as $80.8 million offering 5.77 million shares at $12 to $14 each. RPX Corp., the San Francisco-based provider of a patent-risk management service, is seeking $131.4 million selling 7.3 million shares at $16 to $18 apiece.

Thermon Group Holdings Inc., the San Marcos, Texas-based provider of equipment that protects industrial pipes from freezing, aims to raise $140 million selling 10 million shares at $12 to $14 apiece. VOC Energy Trust, the Austin, Texas-based owner of oil and natural-gas properties in Texas and Kansas, seeks $232.8 million selling 11.1 million units at $19 to $21 each.

Glencore International AG, the Swiss commodity trading firm seeking $11 billion from a dual-city IPO in London and Hong Kong, is scheduled to announce a price range for the sale tomorrow, according to company documents. Glencore’s IPO, if successful, will be the biggest worldwide since General Motors Co. raised $18.1 billion in November, data compiled by Bloomberg show.

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DEALS TO WATCH THIS WEEK:
Company         No. of Shares   Price Range   Date Expected
                    or ADRs
Renren          53.1 million    $12 to $14     May 3
Boingo Wireless 5.78 million    $12 to $14     May 3
NetQin Mobile   7.14 million  $9.50 to $11.50  May 4
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