With 64% of the US search market and market-leading applications in many categories, Google seems unbeatable. Except in China, the world’s largest and fastest-growing Internet market.
There, Google is a distant number two to Baidu, China’s leading search engine, which holds 60% share of search versus Google’s 30%. Recently Baidu announced record earnings, and is almost at a 52-week high (now at US$12 Billion, five times more valuable than Diller’s IAC).
What’s going on? Why is Baidu so strong in China, and why is Google so weak? Is Google doomed to fail in China, the way so many other American companies have?
My short answer: No, Google won’t fail. In fact, if I were running Baidu, I would be very worried–and not just about Google. I think Baidu’s historical success was based on five key factors, all of which are changing for the worse.
First, Baidu’s search results have historically been much better than Google’s, but this is now changing. As is the case in any country, localisation matters a lot. Several years ago, I remember searching for “she” in Google China and in Baidu. Google thought I was looking for the pronoun, while Baidu understood that I was looking for a famous Taiwanese rock band called S.H.E. However, Google’s results have been getting much better lately. This trend is easy to see when you track the search share in China, courtesy of CNNIC, China’s official source of Internet-related information:
Google’s gains over the last 5 quarters are impressive. Based on many conversations with Chinese online users, my sense is that Google is finally paying attention to China, starting with the quality of its search results. At the same time, Chinese users are rapidly differentiating between how the two companies display search results. Google’s main results are based on algorithmic relevance, with ads appearing only in the right-hand column. In contrast, Baidu has historically sold all search results (both main results and the right-hand column). Therefore, on Baidu your first few pages are filled with ads from the companies which paid the most to be there; on Google pages show the “best” results.
The best evidence that Chinese users prefer Google’s approach is Baidu’s recently-launched “Phoenix Nest” design. Baidu has essentially thrown in the towel by only selling the top 4 results on the left-side. After those ads, algorithmic relevance kicks in. I suspect that Baidu made this huge change after noticing that millions of users prefer the Google approach.
Now that Baidu and Google look so similar, my sense is that Google will continue to gain search share. Why? Google can afford to hire more engineering talent than Baidu can, since Google is a much larger company with bigger margins. Both companies have large engineering centres in Beijing, but among my friends, the “cool” jobs are at Google, not Baidu (itself an interesting data point). In the search engine race, talent really matters.
Second, Baidu invented some hugely-popular applications that had no Google equivalent–but Google is finally catching up. Baidu’s first killer app was “music search”, which made it very easy to find and download pirated music. Without going into the legal issues, the service was (and is) extremely popular. Aother example is something called “Hao123,” which is sort of like the very first version of Yahoo – a super-fast, categorized, hand-built directory of Chinese web sites. Finally, Baidu has “Tieba,” a powerful “search engine meets BBS” application that is perfectly suited for China’s BBS-centric Internet. These three killer apps have arguably been just as important as search to Baidu’s success to date.
In the last two years, however, Google’s China team has fought back, with success. They recently launched a terrific music service that lets users download (not stream) un-locked music files, for free. Imagine a free iTunes store that is as fast as Google, and that is hardware-agnostic. No kidding (too bad it only works when you are physically in China). Google also launched an equivalent of Hao123. In short, after years of watching from the sidelines, the Google China team has clearly been given the freedom, and resources, to customise Google for China, with impressive results so far.
The third historical reason for Baidu’s strength has been their large, old-fashioned sales force–but Google is finally addressing this, too. When you sign up as a Baidu advertiser, you get your own sales rep, who is happy to explain how it works, take your order, and tell you how it’s working. In contrast, Google’s automated AdWords system is daunting. Up until recently, you needed an international credit card to buy Google ads in China, and Google China couldn’t issue official Chinese receipts. Beyond making it easier to generate revenue, Baidu’s national sales force, and huge network of authorised resellers, constantly spread the story that Baidu was better.
This has now changed. Google now accepts many forms of payments, can issue Chinese receipts, and even has a toll-free hotline. At the same time, the largest Baidu customers are now pressing Baidu for the same super-simple, highly-transparent buying process that Google offers. These Baidu advertisers are also questioning the “reports” they get about ad performance, and are asking for believable and easy-to-use analytics tools.
In short, because Chinese advertisers are becoming more sophisticated, Baidu’s traditional sales force may not be the necessity it used to be, and could instead turn into a high-cost albatross. I’m starting to see resumes from laid-off Baidu sales people, and have heard stories about push-back from Baidu’s sales force as their commissions are cut.
Fourth, Baidu has historically enjoyed serious support from the Chinese government, but this is changing. Many juicy rumours abound about the exact nature and extent of this support over the years, but most observers agree that the Chinese government, eager to promote local companies, favoured Baidu and made life difficult for Google.
However, this has recently changed. Baidu was recently criticised quite publicly on CCTV (China’s television network) for questionable business practices. There is no American equivalent for this sort of heavy-handed smack-down – my friends surmise that Baidu’s success-turned-arrogance proved to be too much for even their government friends to bear. Of course, CCTV promptly followed up by criticising Google China, but that was nothing new. The news was that Baidu could no longer bet on unlimited government support.
Finally, Baidu is losing focus. Like Google, Baidu had a clear and compelling mission. It was focused solely on China. Recently, however, Baidu has been focusing a lot of attention on international expansion, especially in Japan. At the same time, Baidu is cutting media deals (most recently with The Discovery Channel). Is the laser focus of yesteryear being replaced with scope creep?
To sum up, Baidu’s five historical advantages are no longer as strong, in large part due to Google’s more-aggressive approach to China.
At the same time, just as competition is heating up, Baidu’s own allies – local Chinese companies – are also getting restive. The most interesting battleground is e-commerce. Many believe that historically, the Alibaba Group (owners of B2B leader Alibaba.com and B2C leader Taobao.com) was Baidu’s largest advertiser. Last year, however, Baidu announced plans to launch its own B2C platform, in competition with Taobao. The Alibaba Group supposedly then stopped buying Baidu advertising, with no real negative impact to Alibaba’s traffic. Ouch. At the same time, by entering the e-commerce field, Baidu was also seen to be competing with behemoth Tencent (better known as QQ), which has its own ecommerce offering. Another former-ally turned competitor.
All this contributes to why I would be worried if I were running Baidu. Google has clearly taken its gloves off. They are innovating in China-specific ways, backed by a huge war chest. Instead of out-innovating, Baidu seems to be following, which is usually a bad sign. Baidu’s killer apps are no longer unique. Baidu’s sales force has done such a good job educating online advertisers that some of these companies are starting to prefer Google’s faster and easier self-serve approach, backed by high-quality Google Analytics. Baidu can no longer count on unlimited government support, and needs to avoid knives from local competitors. Perhaps this is why the company is looking to overseas growth and sexy media company deals?
Baidu’s revenue and profits will likely continue to grow, simply because the market is growing so fast, and advertisers have few choices for search advertising. I also bet that Baidu’s stock will continue to out-perform, simply because it’s a great way to play the “China Internet” story.
But the company’s days as China’s undisputed Google-killer are numbered.
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