Cyworld Attacks!
South Korea's most popular social network, a strange blend of Blogger, Flickr, and videogame like avatars, brings in about $300,000 a day. Now it's launching a U.S. version. Should MySpace be worried?
By Erick Schonfeld, Business 2.0 Magazine editor-at-large

(Business 2.0 Magazine) -- 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.

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. Wherever she goes, she uploads photos: snaps of her meals, her purchases, and her eerie doll collection.

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, or more than a third of the country's entire population. And 90 percent of all Koreans in their 20s, like Kwon, have signed up.

Deep market penetration

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. There's relatively little advertising and a whole lot of viral marketing, and 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.

Who would win a straight battle between Cyworld and MySpace? We're about to find out, as Cyworld is launching a U.S. version this month.

Parent company SK Communications (a subsidiary of SK Telecom (Charts), Korea's largest wireless carrier) has spent the past year launching sister sites in China (where it already has 1.5 million users) and Japan.

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.

Targeting teenage girls

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.

"There are many social-networking services in the U.S.," admits Hyun Oh Yoo, SK Communications's CEO, as he lays out his plans for global expansion on the 20th floor of his brand-new headquarters in Seoul.

He fingers a small object attached to his cell phone, a charm in the shape of a Cyworld character. "But," he says, dripping with the confidence of a man whose product has become a national institution in the span of half a decade, "their quality is not as high as Cyworld."

The company has learned much in its short life. It was founded in 1999 by four graduates of KAIST, the MIT of Korea, who thought of it as a personal contact website, a way to connect to your immediate circle of friends and family (your "ilchon").

It was hardly an overnight success. "They had a very hard time to even pay their employees or afford their servers," says Yoo, who was then a corporate strategist for SK Telecom.

Spotting an opportunity, Yoo put together a deal, and SK Communications snapped up Cyworld for a mere $8.5 million in 2003. It was good timing.

Really unique product features

Cyworld had introduced the "minihompy," or mini-homepage, two years earlier and had been steadily adding features. By 2003 the user could upload photos, write a blog (called a "paper" in Cyworld), and create digital sketches.

Then there was the mini-room - a three-dimensional virtual space - and the mini-me (no relation to the Austin Powers character), an avatar that the user could place in her mini-room and send out to visit others.

The mini-homepage, and especially the mini-room, gave Cyworld a new lease on life. Now members could create their own content, decorate their rooms, and outfit their mini-me.

Yoo, who has a Ph.D. in media studies from Michigan State, calls it a "personal media network." Since users had to provide Social Security numbers, there was no anonymity of the kind that is causing legal trouble for MySpace.

"If you are acting like a dork," says Seung-hoon Lee, head of Cyworld in Korea, "you are showing your family and friends that you are a dork." (It also means there is no double-counting in Cyworld's membership figures.)

New revenue source - acorns

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 and mini-room, 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.

At first, users could buy acorns only as gifts for others. This was supposed to "minimize people's repulsion for paying for these items," recalls veteran employee Ji-young Park, Cyworld's chief service planner.

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

As the user base expanded from young women to their boyfriends, husbands, and family members, the culture and economy of Cyworld were set. Lee believes that after the site hit 2 million members - right after the acquisition - it had its own momentum. The chances of anyone in South Korea (population: 48 million) knowing someone on the site increased exponentially.

Last year SK Communications had sales of $160 million and profit of $25 million. Half of that revenue and a majority of the profit came from Cyworld. (The company also owns a portal called Nate.com and an instant-messaging service.)

This year Cyworld expects to contribute $140 million in sales, with acorns accounting for 70 percent. That means Korean consumers will shell out more than $100 million this year for Cyworld virtual inventory.

There are about 400,000 items on the site today, and the only real cost is the revenue Cyworld splits with the 4,400 small graphic design shops and license holders that actually create the virtual items (and get 30 to 50 percent of the proceeds, depending on the item).

A third of that revenue is for music, where Cyworld has pioneered another new business model. For 50 cents you can stream a song on your homepage to anyone who visits.

Cyworld, via a partner, negotiates broadcast licenses with music labels. "You don't play it for your own benefit," Yoo explains. "You play it to visitors of your homepage to express who you are" - to impress friends with your musical taste, in other words.

Last year's most popular track, by a group called Sweetbox, sold 1.5 million times. Cyworld sells 6 million songs a month, making it one of the most successful digital-music stores on the planet.

Cyworld is also increasingly bringing in revenue from mobile services. There are 2.6 million customers who have signed up to access Cyworld via cell phone for free, paying only upload charges. And they do: 90 percent of all images uploaded in Korea go to Cyworld.

On the advertising front, Cyworld is entering exciting new territory. There are banner ads on its homepage and on the pages of the most popular of Cyworld's 1 million clubs, which are considered public territory.

But personal mini-homepages do not carry ads at all. Instead, any business can become a Cyworld member, setting up its own mini-homepage and creating direct relationships with consumers. About 30,000 have done so.

For example, one of Lee's ilchon is neither a family member nor a friend, but a diving shop. Its mini-homepage has a diving blog, an ocean-themed mini-room, and news about upcoming diving events.

"We have too much spam in Korea," Lee explains. "This is opt-in. I allow them to visit my homepage. If I don't like them, I can delete them." The diving shop's ilchon is, in effect, its direct-marketing mailing list - but one Lee will stay on only if the relationship is mutually beneficial.

And here's how to ensure such a beneficial relationship: Give customers free digital items or a chance to win acorns. Promotional homepage skins and other items act as advertisements on members' mini-homepages.

A pomegranate-juice maker, for instance, offers a skin featuring a Korean movie star lounging in a white suit holding a can of juice to his head. Three and a half million Cyworlders have visited this homepage, and 30,000 of them have downloaded the skin. These promotional items, for which the companies pay Cyworld, account for about 10 percent of acorn revenue.

Cyworld helps turn consumers into not just publishers and website designers but also personal marketers. Lee writes a wine blog, and when he needs pictures of wine bottles he'll often take them from the website of his favorite wine shop. The picture in his blog then acts as a link to that store. "That is real marketing," Lee says, "because I am stamping this shop as good."

But will it work in the 'States?

So how does Cyworld plan to export its quirky brand of social networking - with its mini-rooms and acorn-based economy - to the United States? The answer can be found in a bare-bones office above a Quiznos restaurant in San Francisco.

There, in a back room filled with drab gray cubicles, is Cyworld's lone American outpost. Eight Korean transplants and 14 local hires, most of them Asian Americans, have been busy rebuilding the website for an American audience since January. The transplants live in the same apartment building a block away.

Despite a $10 million commitment from SK Communications, the U.S. operation is keeping extravagances to a minimum. In CEO Henry Chon's office, one of the few decorations is a sculpture of a Cyworld acorn made by a Korean art student in San Francisco who knocked on the door one day and, in true dotori spirit, offered it as a gift.

"We are trying to create something that works here without losing that aspect from Korea," Chon says.

Yoo is counting on Chon's background to help Cyworld bridge East and West. Chon was born in South Korea but moved to North America for college and stayed to pursue a career in wireless telecom. He and his wife use Cyworld to share pictures of their baby with relatives back home.

But 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.

To adapt Cyworld's sensibility to the United States, Chon paired up each of the native Koreans on staff with an American, and the two sides debated which features to keep.

For instance, when chief marketer Michael Streefland, formerly of iVillage, pulled up his profile on the Cyworld beta site, one of the fields was for his blood type. Koreans think of blood type the way Americans think of astrology. "But we get a little creeped out by it," Streefland says. "So that's going away."

The U.S. version will launch in mid-August with just three major components: the mini-homepage, clubs, and the digital store. The team added a navigation dashboard that appears on every page, as well as a "My Cyworld" tab that will give American users a single view of everything they and their friends have done.

The Korean site, by contrast, looks like a side street in Seoul packed with blaring signs. "We don't want people to be overwhelmed," says marketing director Kathy Yu.

The result: 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-room, photos, journal, guest book, sketches, and bookmarks).

As in Korea, you can buy professionally designed background skins, along with digital items with which to decorate your mini-room.

Different revenue streams

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 may be appealing - it's why venture capitalists are calling every other week to ask if they can invest. (The answer is no.)

But Cyworld expects that no more than 15 percent of members will actually pay for acorns in the early stages. "The American public is not used to buying ones and zeros," says Won Seok Chung, the company's director of business development. "You have to change people's minds that this is cool to buy."

To seed the market, so to speak, members will get free acorns when they sign up, promotional acorns from advertisers, and extra acorns for referring friends or moderating clubs.

In the meantime, Chung, an inveterate dealmaker, is hard at work lining up other sources of revenue. At his former employer, Korean online gaming company NCsoft (which produces City of Heroes, Guild Wars, and Lineage), he helped strike the first deal with Coca-Cola (Charts) to put videogame characters on Coke cans in Korea.

Now he's working to strike agreements with big advertisers and wireless carriers, many of which have relationships with Cyworld in Korea. He persuaded PayPal to provide the micropayment infrastructure and is hoping to land a major player to supply instant messaging.

Chung's biggest hopes are for deals with music companies. "The labels love us in Korea," Chung says. "Hopefully they will give us a break here." Cyworld plans to sell 100,000 songs at launch.

Still, impressive deals don'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. Hi5, Multiply, TagWorld, and even the much-maligned Friendster are gaining fast. Cyworld has discovered many more waiting in the wings. "Our intelligence shows there are probably 30 launching this year," Streefland says.

Targeting U.S. youth

That's why Cyworld retained Look-Look, a youth culture research firm based in Los Angeles. Look-Look has amassed an online panel of 35,000 young consumers who answer surveys, write blogs about assigned topics, and participate in focus groups.

Co-founder Sharon Lee gave Chon and his team a crash course in Youth 101 and the harsh realities of trying to break into that demographic.

It goes like this: There are 42 million 16- to 24-year-old Americans, who influence the spending of more than $250 billion a year. They are one of advertisers' most desirable audiences, but they are also the most difficult to reach.

"This audience doesn't need one more product of any kind from anybody," Lee says. "They have too many choices as it is. Their brains have become TiVo, and they are editing out a lot of this marketing." The medium they trust most is word of mouth, with 86 percent of them ranking it first. A distant second, at 53 percent, is TV. And that gap has been growing.

The single most important factor in getting people to join is having friends who are already on the network. So when every teenager and 20-something already has a profile on MySpace or Facebook, how many more social networks are they willing to try?

The answer, according to Lee, is more than you might think. Two-thirds of U.S. youths have profiles on multiple networks - but 53 percent would join another if it were compelling enough. "They are playing with identities," Lee says. "They are trying to figure out who they are."

On MySpace, they can be glamorous party creatures. On Facebook, they can be students. And on Cyworld, the bet goes, they can be themselves. "Everyone in our focus groups has a MySpace page," Streefland says, "but it doesn't necessarily satisfy them. They think of MySpace as the stadium. But Cyworld is the slumber party." The consumers who reacted most positively to Cyworld in focus groups were female high school juniors and seniors.

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.

"It's not about sitting in front of your computer," Streefland says. "Go out and have a great life, and then come back to share it."

With this wholesome approach, Cyworld hopes to attract 2 million American members by the end of next year. And that's just for starters. In July, Cyworld signed a deal with T-Online to launch in Germany.

Back in Seoul, CEO Yoo explains that he plans to use the United States as "a springboard to go into other markets, like Europe." Yoo's face betrays no emotion when he says this. But the mini-me charm swinging from his cell phone is grinning like a maniac.

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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.