China's new Internet darlings face old problems

China may not have been first to a launch social networking site, but it might be first to float one. Renren.com is eyeing an initial public offering in New York. Owner Oak Pacific is thought to want a valuation of $500 million. The potential for new internet darlings is huge, if they can avoid some old-school problems.

Renren already has 30 million active users, and runs paid advertising as well as gaming. Oak Pacific also runs a group-buying service, in the vein of U.S. site Groupon. Renren's ad revenue could reach $60 million in 2010, based on third-quarter figures. That's a good start, if far from Facebook's 500 million users and annual ad revenues of more than $1 billion.

Two things argue in Renren's favour. First, online advertising and gaming have a big potential in China. The average Chinese Internet user spends 2.7 hours a day on the Web, versus 0.4 hours for Americans, according to Boston Consulting. Half of China's 235 million Internet users have already given social networking a big like.

Second, the global leader won't get a look in. Facebook is blocked in China. President Hu Jintao called for yet tougher measures on Feb. 19. Web censorship may one day deter customers, but for now, such barriers offer a big boost to home-grown versions of U.S. inventions like Youtube, Google and Twitter. Renren's biggest risks may be more old fashioned. Competition in China is intense. Kaixin001.com is a popular rival among white-collar workers. Renren could still start out as China's Facebook, only to become China's Bebo instead.

State meddling, meanwhile, isn't limited to blocking content. The regulator can also be a competitor. China Mobile and state-run Xinhua News Agency said on Feb. 22 they had launched an Internet search engine. Social networking could be next.

Finally, Alibaba has provided another lesson: super-fast growth can get in the way of doing business honestly, online as well as off. The e-commerce giant replaced its chief executive after numerous sales staff were found to be chasing fees by helping fraudulent sellers. Such things are hard to predict from an IPO prospectus -- but show that investors dazzled by the ascent of China's dotcom hotshots must stay wary of real-world risks.

CONTEXT NEWS

-- Renren.com, a Chinese social networking website, plans to sell shares in a U.S. initial public offering. The company was preparing an IPO of about $500 million, according to Bloomberg.

-- Oak Pacific, Renren's owner, had hired Credit Suisse Group AG, Deutsche Bank AG and Morgan Stanley to underwrite an IPO, planned for the first half of 2010, according to people familiar with the matter.