Facebook bowing down to China's censorship overlords is bad for business

It's been staring us in the face for a couple of years now.

From Mark Zuckerberg's bromance with Xi Jinping (he even went so far as to ask the Chinese President for possible baby names) to welcoming China's internet czar with open arms at the company's Menlo Park headquarters, and his use of Mandarin at any possible opportunity. Zuckerberg's willingness to appease China even went so far that he was willing to risk his health by jogging through the smog in Beijing.

And yet, the news on Tuesday that Facebook is building a censorship tool to allow it re-enter the Chinese market after a seven-year absence, still came as a big shock — especially as the company didn't even bother to deny it.

The shock was obviously inflated because of the huge focus on fake news at Facebook in recent weeks, and the company's (perceived or otherwise) lack of action in addressing the matter.

"Facebook in general, and Mark Zuckerberg in particular, could not be more craven in their expressions of ardor for China's 1.4 billion potential Facebook users – and no wonder" said tech analyst Ben Thompson. "Access to the Chinese market is the single most transformative possibility when it comes to Facebook's growth prospects."

Facebook's submission to censorship

What's new here is that Facebook is creating a tool specifically to meet the demand of one country, and in doing so is showing itself to be a submissive pawn in China's overarching aim to create its very own version of the internet.

Not only will Facebook be required to censor topics sensitive to the sensibilities of the Chinese government, it will also have to store all Chinese user data in China; partner with a local company to roll out Facebook China; and adhere to strict online rules specifically for foreign companies, which were published by the government earlier this year.

Of course many will understand Facebook's willingness to bend over backwards.

Since it was banned in July 2009, Facebook is a completely different company. It has grown from 300 million users to 1.8 billion. Its annual revenues have gone from $650m to an estimated $25bn in 2016. And crucially, it is now also a public company and, as such, needs to answer to shareholders.

What they want to see is growth, and while Facebook has so far confounded Wall Street by continuing to grow at an incredible pace — despite its huge size — that won't continue forever.

And so China, with its 1.4 billion people (about 20% of the world's population), is a very appealing prospect.

Fools gold?

The problem is that, while Zuckerberg appears hell bent on re-establishing a presence in China, the benefits to Facebook may be minimal and the potential downside could be huge.

Zuckerberg and Facebook clearly see the benefit of growing its business in China, and there is no doubt that, should the social network tap even a fraction of the Chinese user base, then it will help drive revenue growth.

The thing is, a watered-down Facebook is unlikely to appeal to Chinese users who already have an abundance of social networks (QQ, WeChat, Weibo) which are hugely popular and understand the Chinese audience.

Facebook's big appeal to Chinese users at the moment is the fact it is outside the Great Firewall. By moving inside it, Facebook will lose its appeal and therefore its ability to grow a significant audience.

On the flip side, Facebook's kowtowing to the Chinese government will be viewed negatively in other parts of the world, particularly in the US where Donald Trump's rejection of the Trans Pacific Partnership deal shows that doing deals with Asian countries is a top priority.

Over half of Facebook's revenue comes from North America, and while China may add some much needed new users, the negative impact elsewhere on its reputation — and by extension its business — could be significant.

Mike Isaac, who broke the story on the New York Times, reports that several people have left the company over the development of the tool, indicating that Zuckerberg's willingness to appease his Chinese overlords is now a sentiment shared by everyone at the company and the CEO would be wise to pay attention to that resistance before submitting entirely to the Chinese government.