Cyworld ready to attack MySpace
South Korea's most popular social network is launching a U.S. version to combat the U.S. teen sensation in August.
By Erick Schonfeld, Business 2.0 Magazine editor-at-large

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Meeyoo Kwon, a 22-year-old college student, starts every morning the same way: "I just wake up, turn on my laptop, and go to Cyworld," she says.

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Cyworld isn't a game, although its cutesy avatars and 3-D rooms may make it look like one. It's a kind of social network - "cy" is Korean for "relationship" - and Kwon uses it the way Americans check for messages: constantly, on multiple devices. During dinner at a traditional sit-on-the-floor restaurant in downtown Seoul, she sneaks regular peeks at her mobile phone to see if one of her 57 Cyworld friends has posted something new.

In South Korea, there's a term for what Kwon is: a Cyholic. It's hardly an unusual affliction. There are 18 million Cyworld members - that's more than a third of the country's entire population. And 90 percent of all Koreans in their 20s, like Kwon, have signed up.

That makes Cyworld's per capita penetration in South Korea greater than that of MySpace in the United States. And its business plan is unique. The bulk of Cyworld revenue comes from the sale of virtual items worth nearly $300,000 a day, or more than $7 per user per year. By comparison, ad-heavy MySpace makes an estimated $2.17 per user per year.

Social combat

Who would win a straight between Cyworld and MySpace? We're about to find out, as Cyworld is launching a U.S. version in mid-August.

During the past eight months, a team in San Francisco has been feverishly customizing Cyworld to appeal to an American audience, trying to strip away the bubblegum kitsch that works so well in Asia without losing its cool.

It'll be a hellish battle for the hearts and minds of teenage girls - Cyworld's target audience. And it's not as if MySpace (which declined to comment for this article) is the only competition. Facebook, Friendster, Hi5, MSN Spaces, Multiply, TagWorld, Tribe.net, and Yahoo (Charts) 360, to name just a few, are all jostling for population growth.

Still, there's a huge amount at stake for anyone who can tame this fickle market - and Cyworld's fearless leaders think their site offers a unique proposition that could quickly establish the Korean company's world dominance.

The outfit SK Communications snapped up Cyworld for a mere $8.5 million in 2003. It was good timing. Cyworld had introduced the mini-homepage to its users two years earlier and had been steadily adding features. By 2003 the user could use them to upload photos, write a blog, and create digital sketches.

A real business in virtual goods

As Cyworld gathered a critical mass of users, it discovered a new business model. Using the site was free; personalizing it was not. If you wanted to decorate your mini-homepage, you could choose from tens of thousands of digital items - homepage skins, background music, pixelated furniture, virtual appliances. But you had to pay for them with "dotori," or acorns, and you had to buy the acorns with real money.

The virtual goods were cheap - typically less than $1 apiece - and consumers had no problem paying for them. A well-appointed mini-homepage reflected your social standing, and users who did not decorate were considered boring.

This year Cyworld expects to make $140 million in sales, with acorns accounting for 70 percent of that. That means Korean consumers will shell out more than $100 million this year for Cyworld's virtual inventory. Most of the rest its sales comes from mobile services, where customers pay to upload photos (90 percent of all images uploaded in Korea go to Cyworld).

Cyworld is exporting its service to the U.S. through a barebones office above a Quizno's in San Francisco and $10 million in funding, part of which is going to adapt Cyworld's sensibility to the United States. Cyworld U.S. CEO Henry Chon is the first to admit that the Korean site is "a little too cutesy" for American tastes.

"The thing we'd like to retain is how the service is based on your real identity," he says. By linking the identities of new members to their mobile-phone numbers at sign-up, Chon hopes to keep a lid on anonymous accounts - and the exhibitionism that can scare advertisers away.

The U.S. version will launch in mid-August with mini-homepages and a digital store. Where MySpace is as chaotic as a million teenage bedrooms, Cyworld's U.S. version is organized but customizable. Each mini-homepage offers the same tabs (profile, mini-homepage, photos, journal, guest book, sketches, and bookmarks).

Although the store will open with more than 5,000 virtual items for sale, Chon expects to make more money in the United States from advertising than from acorns. The pay-to-decorate model is appealing - it's why venture capitalists are calling every other week to ask if they can invest. (The answer is no.)

Room for more?

But that doesn't change the fact that Cyworld is entering the U.S. market at a time of social-networking saturation. MySpace and Facebook are already well entrenched. But two-thirds of U.S. youths have profiles on multiple networks - and 53 percent would join another if it were compelling enough. On MySpace, they can be glamorous party creatures. On Facebook, they can be students. And on Cyworld, the bet goes, they can be themselves.

Cyworld will by no means be the most advanced social network out there. It offers no video hosting, no podcasting tools, and limited content search. But if the Koreans have done their homework right, such bells and whistles don't matter. Rather, the market turns on creating an emotional connection with young consumers by letting them express themselves in an environment they control.

This is an excerpt from a longer story in Business 2.0's August issue. Click here to read the complete version. Top of page

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.