Search engines searching for success (China Business Weekly) Updated: 2005-08-15 14:02
It has almost become something of a clich these days: Baidu, "the Google of
China." But like most hackneyed expressions, there's an element of truth to it.
The name is on everyone's lips and with good reason. On August 5, Chinese
Internet search engine company Baidu.com posted the highest first day trading
gains on the NASDAQ since 1999. In fact, these were the biggest gains ever
recorded by a foreign enterprise in the history of the US securities industry.
Baidu saw its American depository share rise by 454 per cent on its debut.
Total market capitalization reached almost US$4 billion, although the firm only
made US$303,000 in profits on revenues of US$5.2 million in the first quarter.
One of the main reasons Baidu is attractive to investors is its relationship
with the celebrated US search engine. Google holds a 2.4 per cent stake in
Baidu. There has long been much speculation that the US firm will eventually
acquire Baidu. And Google's stocks have already risen by 344 per cent since its
initial public offering (IPO) on August 18, 2004.
However, while the Chinese company received an enthusiastic welcome from US
investors, Google is facing more headaches as it tries to crack into the world's
second largest Internet market China.
Quick moves
Google said on July 20 that it would open a research centre in China this
quarter so it can tailor products and services for Chinese users and Google's
other markets. This marked the company's formal entry into the country, but the
search engine's impending arrival has been a hot topic for the past year.
The announcement coincided with a scandal and lawsuit involving former
Microsoft executive Lee Kai-fu, who Google had hired to head its Chinese
operations. News of Google's plans came just one day after the company and Lee
were sued by Microsoft for violating a non-compete agreement Lee had signed with
his former employer.
Google has not revealed the details of their research plans or the location
of the centre, but the announcement is believed by some to be a hasty move to
deflect attention away from the lawsuit.
But other analysts say it came at the right time. The Chinese search engine
market, which grew by 74 per cent last year to 1.2 billion yuan (US$148
million), is forecast by research company Shanghai iResearch Co Ltd to maintain
an annual growth rate of over 70 per cent in the next three years and reach
US$660 million by 2007.
"As the last US Internet giant to enter China, the market has become mature
enough for Google to make its decision now," says Henry Yang, president of the
Shanghai-based consulting firm.
Search engine providers Baidu, Sohu, and 3721 under Yahoo! China, have built
a comprehensive distribution channel over the past few years and have promoted
search engines as a publicity tool to small and mid-sized businesses.
Yang says the risks are low and it is a good time for Google to establish a
Chinese presence.
Google has offered Chinese language searches since 2000 and has been watching
the market for several years. It invested in Beijing-based Baidu to get a feel
for the Chinese market, which boasted 103 million Internet users by June 30,
according to the China Internet Network Information Centre.
The search giant also obtained a licence to set up offices in Shanghai.
Lee is another plus for Google's entry into China. The executive, who in 1998
founded Microsoft's research and development centre in Shanghai, has enjoyed
wide respect in the local research, technology and education community.
Lee's involvement might ease Chinese Government concerns about sensitive
content that appears in Google's search results. It will also help Google pull
in more Chinese talent.
Google's search methods, which are mainly based on user frequency, will be
welcomed by some Chinese website owners. Most domestic search engines use a
paid-listing model, in which websites pay a certain amount to rank higher in
search results.
An anti-Baidu alliance of webmasters formed in July claimed the company asked
them to pay for results, saying their web links were deleted from when they did
not pay the appropriate fees.
Challenges ahead
Although Google's entry has been anticipated by the domestic industry for a
long time, it does not guarantee future success for the US giant in China.
Lee could be both a blessing and a curse for Google.
On July 19, Microsoft sued him and Google in the Washington State superior
court, where the software company is based, and tried to block the executive's
defection to Google. Microsoft claims Lee violated a non-compete agreement. It
is concerned about leakage of its trade secrets.
Microsoft says the top computer-user interface technology scientist is
familiar with the company's strategies for the Chinese market and its plans for
developing search technologies.
The court issued a temporary restraining order to prevent Lee from working at
Google and required Microsoft to submit a list of jobs that Lee can do. He is
also forbidden from working on any Google jobs related to his activities at
Microsoft.
The legal battle has brought a lot of negative attention to the search
engine's plans to open its Chinese development centre in the autumn.
And despite Lee's good connections in the local research community, his role
with Microsoft Research in China was mainly on the engineering side. He does not
have much actual business experience.
Rumours suggest that Google will recruit a different business operations
manager, but it won't be easy to find a qualified candidate with sufficient
knowledge of the Chinese Internet market.
Zhou Hongyi, who will leave his post as Yahoo! China president on August 31,
says the Internet industry is fundamentally a culture-based business. Even big
foreign names like Yahoo! need to adapt to the market and cater to the habits of
Chinese users.
Zhou founded channel distribution of search services with Charles Zhang,
chairman and chief executive officer of Chinese Internet portal Sohu.com. Most
Chinese search engines have adopted their innovations.
Their model encourages search engine firms to sign distribution agreements
with partners in different regions. This helps small and mid-sized enterprises
to use paid listings or publish advertisements.
China's 10 million small and mid-sized businesses are the most important
target of search companies, but these companies often experience difficulty
penetrating the Internet. Because these companies are scattered all over the
country, it costs too much time and money for search engines to track down these
enterprises by themselves.
Google, on the other hand, mainly sells advertisements through the Internet
with a higher penetration of the worldwide web in the United States.
But many big US dotcoms are slow to adapt to local market conditions. These
firms usually adopt a unified global strategy.
Yahoo! China was in the red after its entry in 1999. When Zhou, a native
Chinese with no overseas experience, took over the reins in late 2003, the
company became profitable within a year. His aggressive and localized approach
paid off.
Amazon.com, which bought the top Chinese shopping website Joyo.com last year,
tried to apply its global strategy to the domestic market. It has since faced
several key personnel changes, and now employs Chinese managers who understand
the domestic online shopping market, even though they also lack foreign
experience. Joyo's competitor Dangdang.com has taken advantage of the temporary
blunder.
Another difference in the Chinese market is that young people account for
over 80 per cent of the Internet population. Music and movie downloads are one
of the most frequent search engine queries, because search engines are not bound
by any legal liabilities regarding pirated content. They simply provide links.
Jim Sun, an analyst with London-based Evolution Securities, says Internet
traffic from music downloading accounts for almost 30 per cent of Baidu usage,
leading Google with a market share of 45 per cent, compared with Google's 30 per
cent in 2004.
Yahoo! China's search engine service Yisou.com ranked third in the market
last year and music downloading was a big factor.
Google is thus likely to face the choice of whether to include the download
links. If they don't, they will lose traffic.
But the most difficult and sensitive challenge for Google is how to mend
relations with the Chinese Government.
Google's Chinese search service has been blocked several times in the past
few years by Chinese authorities because it included search results forbidden by
Chinese law. This content included anti-China articles and information about
religious cults.
The Chinese operations of Yahoo! and MSN both chose to use only content from
Chinese partners to avoid violating Chinese laws or offending local
sensibilities. Google will have to decide whether to block questionable content
or risk reprisals from the government.
"A top Chinese executive can ease government concerns, but it is unlikely
that Google will be immediately trusted, because search engines have become a
medium as important as, if not more than, Internet portals," says Lu Weigang, an
Internet analyst in Beijing.
Although former Microsoft executive Lee is Chinese and has good connections
in domestic research organizations and the technology industry, he was born in
Taiwan and educated in the United States.
Perhaps Google needs to find a more suitable person to head their business
operations, someone better equipped to bridge the gap with the Chinese
Government, analysts say.
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