Censorship: The Great Enemy Of Skype, Facebook, And Twitter

The determination of foreign governments to protect their national technology franchises or censor information that originates outside their borders could limit the growth prospects of Skype, Facebook, and Twitter. That’s something competition has failed to do.

There are indications that Skype could be prevented from doing business in China.  There are rumors that all VoIP systems originating outside the People’s Republic could be blocked. Some analysts see it as a form of censorship. A more cynical view is that China wants to protect the franchises of its state-owned telecom companies including China Telecom, China Mobile (NYSE: CHL), and China Unicom (NYSE: CHU).

The growth of Facebook and Twitter has been mostly in Western nations. Skype probably has a wider geographic customers base, but says that only 6% of its subscribers are in China. Facebook plans to boost marketing in Russia.  Whether it will meet with any resistance from the government there remains to be seen. Facebook’s new $50 billion valuation is almost certainly linked to its expansion potential outside its home market.

Censorship and the control of voice and personal communications has been less significant in countries other than China. Western companies such Research In Motion (NASDAQ: RIMM) have found that some nations with limited free speech rights will only tolerate Western communications technology so far. India has threatened to shut down the BlackBerry network in its country, claiming that “security concerns” are the reason for this decision.  India does not want encrypted data to move freely among its residents.

On the surface, the battle between China and Google (NASDAQ: GOOG) over censored search results and the break in to Google’s e-mail service in the People’s Republic appears to have little relationship with the India BlackBerry censorship issue.  There is much to suggest that the issues of communications control are more similar in these two countries. Local governments are threatened by the free flow of information, so they attack it at its source. The trouble between Google and China did not affect Google’s stock price more because the US-based search company gets so little revenue from China. Baidu (NASDAQ: BIDU), the local search engine company, has by far the largest market share in China. Certainly, China’s move to shut down the Google operation there was a great help to Baidu.

Skype, Facebook, and Twitter clearly understand the value of China’s 450 million internet users.  At this point, fewer than one in three people in the People’s Republic are online. The numbers are more staggering in India. Only 7% of India’s nearly 1.2 billion people use the internet. In Russia, 43% of the 139 million people are online. The Russian percentage is still low compared with most developed nations in which the number of people online is greater than 80% of the population.

Facebook’s penetration of the US social media market has not peaked, but it is close. One hundred and fifty million people visited Facebook in America during November. Facebook is the most searched term on Google in the US. Facebook’s new growth in its subscriber base will have to come from overseas. Facebook would probably be very popular in China. The Chinese government has currently banned it.

It will not matter ultimately why China battles Skype, Google, or Facebook. Government interests or the interests of local companies produce the same effect on the three firms. China may be the largest single block today to the rapid growth of microblogging, VoIP, and social networks  in the world. India may decide to follow China’s example. It is too early to know what Russia will do. It does have a local search engine, Yandex. Russians use several large social network sites. There is no information yet about whether the central government prefers them over Facebook, or whether any of these sites are monitored.

The valuations of Facebook, Twitter, and Skype still depend more on growth rates than revenue or profitability. The places they need to grow to continue their expansion may not be available to them

Douglas A. McIntyre