Social networking sites have exploded in the recent months in the US: NewsCorp’s myspace has close to 40 million users with a 50% increase in traffic over the last 4 months. Facebook turned down a $750 million offer according to Business Week and is seeking to sell itself for $2 billion!

But nowhere has the phenomenon turned into virtual reality like Korea. Seventeen out of the forty eight million South Koreans are hooked onto Cyworld, a four year old web community operated by SK Telecom. Members cultivate buddy relationships with each other through a personal blog, which includes a photo gallery, message board, guestbook, and personal bulletin board.

As much as 90 percent of South Koreans in their teens and 20s are registered users of Cyworld and an average of 6.2 million photos is uploaded to Cyworld each day, many of them directly from cell phones. Business Week describes the experience of Lee Yu Jin, an 18-year-old freshman at Osan College, for which Cyworld is “the nexus of pretty much everything she does”.

What sets Cyworld apart from traditional blogs and social networking sites is the "minihompi" (mini-room), the virtual room where the blogger's cyberspace "mini me" lives. Users can choose to buy wallpapers, clothes for their virtual counterparts, furniture, background music and other decorations for their minihompi. These items are purchased with Cyworld money – “dotori” – that users can buy from retail shops or through cell phones. SK Communications generated $110 million revenues (half of which by selling dotori) and $12.5 million profits. The company expects sales to double this year and is expanding to China, India and the US.

A phenomenon of this magnitude (1/3 of the South Korean population) has potentially significant effects on the future of online advertising as we evolve from web 1.0 branded content to web 2.0 user generated content. How can brands respond to this virtual reality world and migrate from static websites? Some major brands are testing “clubs”, Cyworld community rooms that users can create to discuss a specific topic and can be furnished like minihompis: HP photoclub is a great example of a photo community hosted on Cyworld.