How great the price of freedom? Photographer: Brent Lewin/Bloomberg
How great the price of freedom? Photographer: Brent Lewin/Bloomberg

The less-than-stellar initial public offering of "China's Twitter," Weibo Corp., provides a unique opportunity to quantify the elusive effect of freedom, or lack thereof, on the value of social networks.

Most attempts to explain why Weibo had to settle for the lower end of its IPO price range, $17, valuing itself at a mere $3.46 billion compared with Twitter's $25.2 billion, mention the Chinese microblog platform's censorship discount. "The caged bird may not sing," as Seth Feigerman put it on Mashable.

Weibo's IPO prospectus says this in the risks section: "Regulation and censorship of information disseminated over the internet in China may adversely affect our business and subject us to liability for information displayed on our platform." Weibo goes on to say it "cannot effectively control or restrict" content published by users despite the fact that censors -- reportedly, 150 of them, aided by a system of software filters -- work around the clock to remove forbidden material. In fact, censorship may be having an adverse effect on Weibo's user base growth. In January, London's Telegraph newspaper published the results of a study it commissioned, showing that Weibo usage dropped sharply after a 2013 campaign by the Chinese government to intimidate influential users. One of them, venture capitalist Charles Xue, was arrested and accused of soliciting prostitutes. Others got the message and either stopped using the platform or cut down on posting.

The concept of a censorship discount would probably be applicable to assets in other countries where governments have little appreciation for civil rights. On Wednesday, Pavel Durov, the founder of Vkontakte, the Facebook clone that is more popular in Russia than the original, said in a blog post that he lost his stake in the company because, as chief executive, he refused to cooperate with the FSB counterintelligence service. It had wanted information about Vkontakte users active in Ukraine's recent rebellion, which ended in the overthrow of President Viktor Yanukovych. "Handing over Ukrainians' personal data to Russian authorities would not just have been illegal, it would have meant betraying the millions of Ukrainians who trusted us," Durov wrote. "In the process I had to sacrifice a lot. In particular, I sold my share of Vkontakte because owning it could have stopped me from making the right decisions."

Vkontakte is majority-owned by Internet holding Mail.ru Group, which is publicly traded. Its annual report lists the possible blockage of resources by the Russian government as a business risk. In theory, the censorship discount could be among factors depressing Mail.ru's share price. Its price-to-earnings ratio is just 11, compared with more than 20 for U.S. peers like Yahoo and AOL.

Weibo's valuation relative to Twitter, however, does not immediately reveal any evidence of a censorship discount.

Here's the math. In the fourth quarter of 2013, Weibo reached 129.1 million monthly active users to Twitter's 241 million, a ratio of 0.54. In the same period, the Chinese company made $71.4 million in revenue, or $0.55 per monthly active user, compared with Twitter's $242 million, or $1 per user. Weibo's appeal is limited to China, while Twitter's is global, so the difference in growth potential also needs to be factored in. China's population is 10.5 percent bigger than Weibo's current audience, while the world's population is 29 times the user base of Twitter, implying a discount ratio of 0.27. Multiplying Twitter's market cap by the three discount ratios gives $2.02 billion -- even less than Weibo's IPO price.

This would imply that markets are too cynical to price in something as ephemeral as freedom. There is, however, a way in which it could still affect valuations: through revenue per user. This indicator is 45 percent lower for Weibo than for Twitter in part because the latter makes most of its money in the U.S., where the advertising market is stronger than in China. Another reason is the Chinese microblogger's lower engagement, in which censorship and self-censorship undoubtedly play a role. On Weibo, about 5 percent of users account for almost all original content. Even counting all the reposts, Weibo registered about 100 million messages a day last year, while Twitter reported 500,000 million tweets a day, 2.7 times as many per monthly active user.

Taking all that into consideration, the censorship discount should be bigger than it is. I wouldn't be surprised if Weibo's shares headed south soon after the IPO.

To contact the writer of this article: Leonid Bershidsky at lbershidsky@bloomberg.net.

To contact the editor responsible for this article: Mark Whitehouse at mwhitehouse1@bloomberg.net.