This paper is based on the case study “Cyworld Launches Against MySpace” in the book of Mike W. Peng (2009, pp. 211-212). In early November, Cyworld announced that it would withdraw from the US market by November 23. At the time of the announcement, this paper has already been in progress. Therefore, the author decided to analyze reasons for Cyworld’s failure rather than evaluating its chances on the US market.
“In social networks, we chat and argue, engage in intellectual discourse, perform acts of commerce, exchange knowledge, share emotional support, make plans, brainstorm, gossip, feud, fall in love, find friends and lose them, play games and metagames, flirt...We do everything people do when people get together (...)“ (Rheingold 1994, p.58).
The above definition describes what online communities are all about – People who interact socially are the essence of MySpace, Facebook, Cyworld and other social networks. Members, who develop new ideas and continually changing content, build the heart of any online community (e.g. Preece 2000).
Despite the common concept, each community has distinctive features, which make them unique; and the rivalry between social networks is intense. They compete for new members and try to build competitive advantage. Ultimately, every social network needs to develop a sustainable business model in order to become successful and, finally, generate revenues and profits.
MySpace and Facebook dominate this market with Facebook being the unprecedented leader and MySpace following it (Kazeniac 2009). The South Korean social network Cyworld, which is extremely successful at home, entered the US market in 2006. Since then, Cyworld tried to translate its home-country success overseas – a futile attempt. In early November, the company announced that it will withdraw from the US market and the website will be shut down in its entirety on November 23rd 2009 (Telecoms Korea 2009).
Things change quickly in this industry: when Cyworld launched in the US, there was lots of talk about competing with MySpace; now MySpace is trying to figure out its own existence while Facebook gains more and more users (Ali 2009).
This essay aims to outline potential reasons for Cyworld’s failure in becoming successful abroad. More specifically, the author will give an overview about the US social networking market in general, the company Cyworld in particular, and challenges that Cyworld had to face while competing in the US.
The success of Cyworld in Korea is really impressive: By late 2007 it had about 22 million users in a country of 50 million people. And 90 percent of all Koreans under the age of 20 have a Cyworld account (e.g. Schonfeld 2006). Even among people not using Cyworld, newly coined words became colloquial. “Cying”, for example, stands for interacting (Kim & Yun 2007).
The history of Cyworld can be traced back to 1999. The network was started in South Korea by a group of MBA students. The name Cyworld was coined of two words – “cy” and “world”. “Cy” means “relationship” in Korean, which defined the goal of the venture. In 2003, SK Telecom, the dominant wireless service provider in South Korea that aimed to grow its own online activities, has acquired Cyworld. SK Comms, the online department of SK Telecom, managed to grow Cyworld’s user base from 2.5 million in 2003 to over 21 million in mid 2007 (Kim & Yun 2007).
In contrast to its competitors, Cyworld aimed to offer a „small, clean community”. It required its members to use their real names and abstained from showing any banner ads. Since 2001, every Cyworld user could create an own mini home page to write diaries and invite friends to leave comments. This strategy got a very positive response.
In 2001, Cyworld came up with a business model that was new to online social networks: As heavy advertising was not an option for a “clean” social network, Cyworld started to offer virtual items for sale. Users could buy virtual gifts for friends or use these items to decorate their mini home pages. These “minihompys” became a means of self-expression and item sales grew rapidly (Gupta and Sangman 2008).
The acquisition by SK Telecom in 2003 provided new cash for Cyworld that has been used for necessary investments in server capacity. Moreover, the cooperation with the largest and the most influential companies in this business is the pledge of Cyworld's success in South Korea. “NateOn”, SK Telcom’s instant messanger service, became a sister company of Cyworld and has the nation's largest membership base, even greater than MSN Messenger by Microsoft. NateOn leveraged on Cyworld’s user base effectively: if a friend was not online, a NateOn user could visit the friend’s minihompy in Cyworld with just one click, and leave a message. (Kim & Yun 2007).
Cyworld introduced a virtual currency, which could be used for transactions within the community, e.g. buying virtual gifts (Kim & Chang 2007). Paid items accounted for 72% of Cyworld’s revenue of $93 million in 2006. Decoration for user’s mini home pages and music generated the largest portions of revenue. By 2006, Cyworld sold 200,000 songs every day for 50 cents each – this is more than iTunes sells in South Korea.
Users were familiar with buying virtual items on Cyworld and the company had the unique advantage of being a first mover with this strategy. Nevertheless, Cyworld executives were evaluating other revenue models (Gupta and Sangman 2008). Apart from item sales, Cyworld was already generating some revenue from mobile networking and advertising.
With mobile Cyworld users could connect to their mini home pages via mobile phones. By 2006, Cyworld had a 90 percent share of the Korean mobile social networking market, accounting for 15 percent of Cyworld’s total revenue – this success was only possible with the help of SK Telecom. Mobile networking was expected to play a critical role in the global expansion of Cyworld (Schonfeld 2006).
Advertising represented only 17 percent of total revenue in 2007. However, it was said to have the greatest potential for growth. Cyworld’s approach to advertising had changed over time. Starting as a “clean community” without ads, it had slowly introduced an interesting advertising-based model: Cyworld engaged a program called “Happy Click” to encourage members to show ads on their mini home pages. It is similar to Google Adsense and enables members to earn virtual currency for each month they show an ad. This approach is unique among online social networks and many executives believed it to be the future of Cyworld and crucial to its expansion plans (Gupta and Sangman 2008).
Facebook was founded in 2004 in the US when Cyworld has already been a vibrating network in South Korea. Today, Facebook is the world’s largest social network with approximately 300 million active users (users who have returned to the site within 30 days) and facebook.com is the second most-trafficked PHP site in the world (Facebook 2009).
Facebook users can create profiles, add friends, send messages through the interface, join communities organized according to city, region, school or other institutions and use thousands of applications. Facebook’s revenues amounted to $300 million in 2008 (Haque 2008). In 2007, Microsoft bought a $240 million stake in Facebook, placing the network’s market value at $15 billion. With Microsoft, Facebook has a financially strong and influential partner going forward (Gupta and Sangman 2008).
The overwhelming success of Facebook can most likely be attributed to its open platform strategy. In May 2007, Facebook opened its doors to external developers to create applications for its users. Current applications allow users to listen to music, write book reviews, play games or join charity drives, just to name a few. Marc Zuckerberg, Facebook’s founder and CEO, has the “vision to position his company as a social operating system just like Windows was for PCs” (Gupta and Sangman 2008, p.18).
Three elements of the Facebook platform allowed for its success: the query language, markup language and the API (application programming interface) – all three are designed in a way to facilitate the development of applications. According to Eisenmann et al. (2009) more than 13,000 applications were launched in 2008 since the Platform released. MySpace and the Internet giant Google (parent company of the online community Orkut, which is very popular in South America) launched similar open-source platforms in 2008: MySpace ID and Google Friend Connect, respectively.
Another important feature offered by Facebook since late 2008 is called Facebook Connect. It allows companies to develop new applications that are directly linked to Facebook’s interface. Facebook Connect enables users to “use their Facebook credentials to log onto third-party websites and bring their on-line social network with them, which can then be used to power social functionalities on these websites” (Eisenmann et al. 2009, p.3).
Facebook is largely supported by advertising. Since November 2007, Facebook uses a targeted ad program called Beacon. Beacon analyses user behavior and targets relevant ads to users and their friends. This so-called behavioral targeting is supposed to increase ad relevancy and enhance advertiser returns. As the launch of the program resulted in strong controversy due to privacy concerns, users can now opt-out of Beacon. Apart from advertising, Facebook encourages developers to sell products and services via their applications, which generates additional revenue for Facebook in the form of commissions (Gupta and Sangman 2008).
Facebook became the undisputed market leader in the industry within a few years. Besides the “hard facts” such Facebook’s open platform strategy, there is the general look and feel, the great usability and the enjoyable atmosphere that attract millions of users every day. Facebook managed to gain a critical mass of users that is necessary to become and remain successful, as network effects drive users to communities with a large member base: If many of my friends join a certain network, it becomes more attractive for me to become a member as well (Beck 2007). From the current perspective, Facebook has a bright future.
 The terms ‘online community’ and ‘social network’ are synonymously used in literature. Both will be used interchangeably during this essay.
 See appendix for an example of a customized mini home page (minihompy)