23, 2005 / Explaining how Baidu.com Inc. emerged as the
dominant search engine in China in a relatively short period
-- and why investors gobbled up the Beijing-based company's
Nasdaq stock offering earlier this month -- is simply a
matter of language and priorities. Click
To Try Out Baidu.com with
Baidu became the No. 1 Chinese search engine partly because of its technical capabilities but also because few other companies in the country were interested in developing that line of business, investing instead in online gaming or messaging systems. But with its booming economy, growing incomes and fledgling e-commerce sector, China is becoming a major battleground for information technology companies worldwide.
Unlike Google Inc., Baidu allows users to search for MP3 music files -- many of which are pirated &emdash; and filters websites and stories that would upset Communist Party leaders.
Within days of Baidu's initial public offering, Yahoo Inc. announced that it was investing $1 billion for a 40% stake in Alibaba.com, China's largest e-commerce website, whose chief executive pledged to develop the world's most powerful search service. That same week, a top executive at Sohu.com Inc., one of China's leading portals, was in Shanghai to promote its new search engine. And Mountain View, Calif.-based Google, the world's largest search site, announced it was boosting its China operations.
Jerry Yang, Yahoo's chairman and co-founder, said his company "clearly [thinks China's] going to be a competitive market for some time to come." In a brief interview shortly after the Alibaba.com deal was announced, Yang said he didn't think the Chinese government would oppose Yahoo's move in China, which restricts foreign ownership of media companies.
"The government has been very open with the commerce area," Yang said.
But not with search engines, as Beijing and its army of Web technocrats have devised increasingly sophisticated methods to control and censor material that Communist Party leaders deem objectionable. Over the years, government regulations have cracked down on search engines.
In its prospectus, Baidu warned of such risks, noting that in June 2002 it was required to shut down its server for a week and pay a fine of about $1,200 "because our search results contained certain content that the public security authorities considered socially harmful."
Later that year, the Chinese government blocked Google's search engine in China for about two weeks, funneling Internet users to Chinese search sites, mainly Baidu. That decision played an important role in boosting Baidu's name, says Hong Bo, an Internet industry analyst in Beijing who edits the research website Donews.com.
At that time, Google was the search site of choice in China and Baidu was relatively unknown to many Chinese Internet users.
In early 2003, Baidu didn't rank in the top five search engines in China, according to a survey by the Chinese World Internet Project at the Chinese Academy of Social Sciences. When the group conducted another survey two years later, Baidu ranked No. 1, with 46% of respondents saying they used Baidu as a primary search service, followed by Google (27%), Yahoo's 3721 (8.5%) and Sina and Sohu, China's top two portals.
In three years, China has doubled the number of Internet users to 103 million today, according to government research. Some analysts expect 400 million Chinese to be online in 10 years.
Oliver Liu, general counsel at Chinadotcom Corp. in Beijing, a major Chinese portal, attributes Baidu's rise to the strong entrepreneurial spirit within the company as well as its connections with state-owned China Telecom, the nation's largest telecom operator.
But Liu and others say that Baidu employees would use Google's search engine to look for sexual content and other sensitive materials, then report the findings to China Telecom, which would be involved in blocking the offensive websites or restricting access to Google. Users in China have long complained that Google's search engine breaks down often and that has caused them to switch to Baidu and other Chinese search services.
Shawn Wang, Baidu's chief financial officer, said he wasn't aware of Baidu using such tactics against competitors. Wang, who was educated in the U.S. and previously worked for PricewaterhouseCoopers, said Baidu's lead in the market reflected the strength of its technology. He said that when a Baidu user searches for something in Chinese, a new window pops up -- unlike Google's search function.
"This is something Chinese users like," he said.
Other Chinese industry executives agree that cultural factors give domestic companies an edge over foreign rivals. "The IT industry, especially search engines, is different from manufacturing areas in that there are 5,000 years of Chinese culture involved," said Wang Jianjun, vice president of Sohu.com, which calls its search service Sogou, or "search dog" in Chinese. "In a word, many American principles can never work in China."
In a nod to such cultural challenges, foreign-based Internet firms are aggressively recruiting top managers familiar with the Chinese market. Google and Microsoft Corp., for instance, have been battling each other over a former Microsoft executive who has been hired by Google to run its China operations.
Zhou Hongyi, former president of Yahoo China, who recently left to pursue investment opportunities with local tech companies, says Google and Yahoo are at a disadvantage in China because their servers in the United States are five to seven times slower than local search providers.
Baidu has become the world's largest Chinese Web index with more than 300 million pages, and its search services include MP3 music files and digital images. "To 99.99% of Chinese users who only search Chinese pages, they will find Baidu has more results and stronger searching capacity," Zhou said.
Many analysts and users say Google enjoys a strong reputation in China, which could help it to catch Baidu. Baidu's home page mimics Google's, and many Chinese, especially those who are better educated and earn high incomes, are more likely to turn to Google, according to surveys by the Chinese World Internet Project.
"When I want to know the truth, I will never use Chinese search engines," said Kevin Bao, 20, an auditing student at a university in Nanjing. He says Chinese firms are more controlled by the government, hence their searches are more limited on sensitive topics, such as politics or religion. Baidu executives make no apologies for toeing the government line.
"We are a Chinese search engine. We have to abide by Chinese laws and regulations," said Wang, Baidu's finance chief. "I'm not sure our competitors do the same thing."
Baidu also offers something that Google doesn't: MP3 searches, which are extremely popular with the growing number of young Chinese who are joining the ranks of Internet users.
Surveys indicate that Chinese search engine users look for entertainment data considerably more than news or information for work, study or personal reasons. MP3 searches account for about one-fifth of the traffic at Baidu.
Although other Chinese Internet search companies offer such services, there may be growing pressure for them to stop because of concerns about copyright piracy. Last week, Netease, a Chinese Internet portal that is listed on Nasdaq, said it would halt its MP3 service because most songs online were pirated.
Baidu hasn't commented on its plans for music-search features. But Liu Bing, an analyst at CCW Research in Beijing, says he thinks that could cause problems for Baidu.
To keep its lead, Liu says, the company will have to run its own search machine.
"What Baidu needs," he said, "is to find the future trend of search engines and develop the technology."
(BEGIN TEXT OF INFOBOX)
Incorporated: Jan. 2000, in Cayman Islands
Ranking: Fifth-most-visited website in the world, according to Alexa.com
What it offers: The world's largest Chinese Web index, with more than 300 million pages. Search services include news, MP3 music files and digital images. Also operates 820,000 message boards.
What "Baidu" means: Hundreds of times
Sources: Bloomberg News, Times research