BAIDU: NOT JUST "CHINA'S GOOGLE"

By Simon Burns, Technology Review, USA, September 12, 2005

What's the leading search engine in China? If you said Google, you're showing your Western bias. It's actually Baidu.com, whose stock debuted on the Nasdaq exchange on August 5, raising some $87 million for the startup.

Companies like Baidu are now riding a wave of investor expectations that Internet searching will become a big business in China--and that local search companies may understand how to reach Chinese consumers better than outsiders like Google.

Those new consumers are, of course, much poorer on average than U.S. or European shoppers. But there are 1.3 billion of them, and the Chinese economy continues to grow at about 9 percent per year, spawning a middle class with real spending power, especially in coastal cities such as Shanghai and Guangzhou.

"There are already about 30 million [Chinese] who can afford to buy luxury goods," says William Bao Bean, a vice-president at Deutsche Bank in Hong Kong. "That should grow to 100 million in three years. China is set to eclipse Japan in spending on luxury goods by the end of the decade."

An increasing number of Chinese consumers will be finding those goods on the Web, and both Chinese and international search companies—such as Baidu, Sohu, Sina, Google, and Yahoo—are scrambling for a piece of the pie.

For the moment, Baidu and Google are in the lead. A recent survey by the government-controlled China Internet Network Information Center, showed Baidu with an average market share of 47.8 percent in China's three largest cities, compared with 33.0 percent for Google. All other competitors lagged far behind.

While Baidu's revenues are relatively slender--$8.4 million for the second quarter of 2005, compared with $1.38 billion at Google--it remains the world's most visited Chinese language website, according to statistics collected by Alexa Internet.

It also earns a far greater share of Chinese advertising dollars than Google, according Jim Sun, an Internet industry analyst with Evolution Securities in Shanghai. Indeed, that may be why Google itself bought a minority stake in Baidu in June. (The size of the deal was not disclosed.)

The company's local connections and home-grown business practices are what give it an advantage over rivals, according to Sun. For example, Baidu doesn't require clients to use a credit card to pay for their ads, as Google does.

"Google's revenues [in China] last year were below 50 million RMB [US$6.1 million]...because people have to pay Google through credit card, and Chinese clients seldom use credit cards," says Sun.

Baidu also offers an appealing product to advertisers that Google doesn't: paid search placement, or the selling of search engine results for particular keywords to the highest bidder.

In a Baidu search on the word "Beijing," for example, the top four results appear to be paid links to travel agents and other businesses. These links are indistinguishable from the normal, unpaid results on Baidu. Chinese Web surfers don't seem to mind; indeed, paid placement is the primary source of Baidu's revenues. But it's a strategy Google has adamantly refused to consider.

Finally, Internet companies operating in China are more accustomed than Western firms to dealing with censorship. As has been reported widely in the global press, politically sensitive keywords are banned on Chinese search engines. Searching for "Tiananmen" on Google's Chinese edition, for instance, brings up a few Web pages mentioning the Chinese government's infamous crackdown in that Beijing square in 1989. On Baidu, those sites simply don't appear.

Savvy Chinese Internet users, who seem more focused on business than politics, simply work around this censorship, and Baidu's practices "will not have a serious impact on public opinion," in Sun's words. But when Western companies operating websites in China bow to the same government policies, they catch flak back home. (U.S. bloggers criticized Microsoft earlier this summer, for example, for blocking banned words in the titles of blogs created by Chinese users of its MSN Spaces service.)

Foreign companies like Google need to adapt to local conditions if they are to have any chance of success in China, says Caroline Straathof, senior director of Investor Relations and Corporate Communications at the popular Chinese Internet portal Sohu. "Spending a lot of money is not the solution," Straathof says.

Google has begun to learn: in recent months, says Sun, it has imitated Baidu by signing up several local distributors who handle ad sales on commission, and can accept payment from customers without credit cards. "I think those companies will develop Google's business in China very quickly," says Sun. "So I believe Google will gain very big revenue share within the next few quarters." If it wants to expand even faster, Sun notes, there's always one more option: use some of its billions buy the rest of Baidu.

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