Dispatch

Where Google Loses

Baidu is the dominant search engine in the world's biggest (and fastest-growing) Internet market -- China. But how did it outsmart Google? 

Besides a cloud of smoke, sticky keyboards, and the incessant sound of noodle-slurping, nearly every Internet cafe in China has one thing in common: All home pages are set to Baidu.com, China's dominant search engine. It's not a coincidence, or even a matter of preference. Back in 2005, when Baidu was just a start-up, company representatives traveled through China persuading Internet cafe owners from Beijing to Kunming to install its toolbar and home page. In addition, it set up alliances with dozens of Internet directory sites, where most first-time Internet users in China start surfing. Now, the vast majority of the online population uses Internet cafes -- and the vast majority of searches go through Baidu. Simply put, Baidu knows China. And Google can't seem to catch up or catch on.

Baidu's overwhelming dominance comes down to Google's woeful ineptness at adjusting to Chinese market realities. Google entered the Chinese market and treated it like any other. But, from the beginning, Baidu operated as a Chinese company, using Chinese strategies and tailoring itself for Chinese needs. Thus, in terms of dealing with the government, popularizing the brand, making sales, and offering the masses what they want, Baidu bests Google.

The Beijing-based search engine (whose name means "hundreds of times," after a line in an 800-year-old poem) maintains an astounding 70 percent market share. California-based Google trails far behind, with only about 25 percent. As China now has the world's largest (and fastest-growing) Internet community, with 338 million users, market dominance means a whole lot of profit, both now and in the future.

The business world has cottoned on. Baidu's price-to-earnings ratio, a good way to gauge investors' expectations for growth, is double Google's. (Baidu has been listed on the NASDAQ stock exchange since August 2005.) This is in part because China's Internet saturation is only about 25 percent, compared with more than 75 percent on average in OECD countries, like the United States. Meanwhile, Baidu's net income is increasing wildly: 40 percent year-on-year, compared with 18 percent for Google. Every indication points to fast growth and lucrative profit.

The secret to Baidu's success -- and Google's failure -- is largely positioning. First, Baidu has managed to win Beijing's favor, a trump card in this command economy. The government controls the Internet and appreciates loyal partners. Baidu understands that it operates under the good graces of the Chinese Communist Party, and continues to show it. As Robin Li, the company's chief executive, said in an interview with the Guardian, "As a locally operated company we need to obey the Chinese law. If the law determines that certain information is illegal, we need to remove it from our index."

Google also allows its content to be censored. But it does so reluctantly and poorly, compared with Baidu and its army of Chinese programmers. From a Chinese Internet cafe, a search for "Tiananmen June 4" written in Chinese characters -- perhaps the most taboo combination one could create -- yields 915,000 results on Google China. It gets just 11,300 results, 99 percent less, on Baidu. Type in "harmonious society," a government catchphrase, and Google gets just over 10 million results. Baidu gets 18 million.

Deference has certainly helped Baidu. Earlier this year, Chinese authorities temporarily blocked Google because it allowed through some pornographic search results. But many of these same results were also available on Baidu -- and in fact an industry insider told me that the large majority of traffic to Baidu's new Japan site comes from mainland users searching for pornography. The implication is that the government has Baidu's back.

"You definitely get a feeling that the government would give Baidu a bit more time to fix a problem than they would give Google," explained Ian McGuinn, director at leading Chinese market research firm JLM Pacific Epoch. "It would be very interesting to see whether the government would try to keep Google from ever getting a majority of the market share. They've messed with Google before when they forbid it from having its servers in China. Searching on Google was incredibly slow, so nobody wanted to use it."

On one of the most contentious issues for search engines -- intellectual property rights and illegal downloading -- the government and Baidu are on the same page as well. Baidu connects users with sites through which they can illegally obtain music. It also allows users to search directly for and illicitly download MP3s.

The Chinese government sometimes gestures toward stopping the practice, but never really does. Recently, for instance, the Ministry of Culture released a circular on illegal downloading. But the document focused on regulations for music itself, requiring posted songs to receive approval and foreign lyrics to be translated into Chinese, for instance. Plus, the Ministry of Culture doesn't even deal with intellectual property protection.

May-seey Leong, Asia regional director for the worldwide music industry trade group International Federation of the Phonographic Industry, explained. "It's not even a regulation," she said. "It's just a lower-level circular and it principally seems to be trying to control content on digital platforms," i.e., so that the government can censor that content.

Simple hometown favoritism seems to have protected Baidu from copyright infringement lawsuits thus far. In 2005, several U.S.-based music companies sued Baidu, but inexplicably lost. In 2006, they sued Yahoo China, an American-based company, and won. (The verdicts were released on the same day.) And the record companies' current lawsuit against Baidu seems to be going nowhere. Leong complained that after nearly two years of legal battles, no verdict has been returned. Even if the lawsuit is somehow successful, the record companies are seeking only $9.7 million in damages, a drop in the bucket for Baidu.

Not that a shutdown of Baidu's MP3 search engine would make a big difference anyway -- it's not driving the company's revenue. Baidu puts banner ads only on its MP3 search, whereas according to its U.S. Securities and Exchange Commission filings, 99.8 percent of its advertising revenue comes from pay-for-placement ads, where advertisers bid for the right to present an advertisement next to specifically searched keywords.

The government allowed Baidu to operate its illegal music search just long enough to attract a huge user base. Now even if the MP3 search disappears, the users are likely to stay, along with the advertisers.

"Very early on, when Baidu was just starting as a search engine, they used music as a tool to gain market share," said T.R. Harrington, a partner at Darwin Marketing, a China-based firm that helps companies optimize their search engine marketing. "Now, they are making next to nothing on their music searches because advertisers realize that users are going only to download music, so not many people want to advertise on that part of the site. They are making almost all their money on keyword advertising, which is also the case for Google."

Also, Baidu is continually rolling out products that focus on creating a social community. Its new Baidu Zhidao ("Baidu Knows") service allows users to answer each other's questions about everything from restaurants to when track superstar Liu Xiang will finally recover from his injury. And Baidu Tieba, a kind of chat room, now accounts for 14 percent of the site's traffic.

Creating a social community is a way of ensuring Baidu's long-term dominance. Unlike in the United States, where people primarily use the Internet for gathering information, in China people first and foremost use the Internet as a social device.

"Two years ago, [music search] was where the business was, a lot more than where it is today," explained McGuinn at JLM Pacific Epoch. "In the past two years, Baidu has added a lot of products. People go to Baidu for a lot of other reasons than just music, and I doubt that is going to change anytime soon."

Indeed, Baidu's entire business strategy is tailored to Chinese governmental, legal, business, and social culture -- and that is what has set it apart from Google.

Take, for instance, advertising. "Once Baidu went public, they invested in brand advertising, something that Google has just been arrogant in their reluctance in a growing market to invest in any kind of advertising to increase their brand awareness," explained Harrington. "Baidu went into all the smaller cities and put up billboards, bus ads, and even commercials on [state television]."

In fact, analysts think that in smaller cities, Baidu's market share could be more than 90 percent. Although Google might be one of the most well-known brand names in the world, most people outside big cities like Beijing and Shanghai have never heard of it, let alone know how to spell it. (Google is apparently catching on -- it recently purchased www.g.cn and starting placing advertisements.)

The same goes for Baidu's sales force. The company has employed thousands of people throughout China to entice small and medium-sized companies to buy keywords. Google has only about 500 people doing the same in the entire billion-person country, and the Chinese sales force has little autonomy, despite many proclamations to the contrary. "The Google model has historically relied more on technology for sales. Having a large sales force has definitely helped Baidu a lot. They are getting people online for the first time," McGuinn said.

The combination of a great market strategy and government favoritism means that Baidu will likely not fall from the top, despite the potential loss of its music search site. This is especially true if Google keeps on quarterbacking from California, which is now even more likely since the surprise resignation of its powerful China president, Lee Kai-Fu.

Google might dominate almost everywhere else, but in China, Baidu is set to stay king.

MARK RALSTON/AFP/Getty Images

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