Google on the defensive
Never mind politics -- the search phenom's biggest problem in China may be search engines with the home field advantage and a lot of moxie.
HONG KONG (FORTUNE) - As Google struggles to deflect criticism in Washington for colluding with Beijing's efforts to censor the Internet, back in China the California-based search giant is waging a different sort of battle. The challenge there is commercial, not political -- but in China too, Google finds itself on the defensive.
Despite its superiority in the US, in China, Google (Research) is chasing a homegrown rival named Baidu (Research), which last year handled an estimated 47 percent of all Chinese search queries, according to iResearch, a Beijing consulting firm. Baidu founder Robin Li, 37, is a Chinese native who studied computer science at the State University of New York at Buffalo and cut his teeth in the search business at Infoseek during the height of the dot-com boom.
"It was a great ride and taught me how the Internet can really transform people's lives," he recalls. But Li left Infoseek in 1999, disillusioned after the company's acquisition by Disney, and returned to China to raise money for a search firm of his own.
Baidu's success has made Li a national hero and Baidu's leading financial backer, California venture capital firm Draper Fischer Jurvetsen, a pile of money. But Google, which holds a 2.7 percent stake in Baidu, is coming on strong.
Last year, Google upped its share of China's search market to 27 percent from 22 percent. Its new, politically-correct search site is based in China in hope of narrowing Baidu's lead. Google expects the new Google.cn site will see higher traffic because it will run from servers within China's Great Firewall, the elaborate system of filters and monitoring mechanisms Beijing has established to keep sensitive content from reaching China-based users. Google hopes its China site will return results faster and with fewer interruptions than searches routed through to servers in the United States.
Li seems unfazed by the prospect of slugging it out with a company whose market capitalization is about 60 times larger than Baidu's. "The Internet is about language and culture, not just technology," he says, sitting in his office in Beijing. "As a Chinese company, we have a better understanding of Chinese users. To win in search, you have to sweat the details. We're better because of the thousands of tiny things we get right every day."
On Feb 22, the Beijing-based company, which listed its shares on the Nasdaq in August, reported that in last three months of 2005, earnings topped $3 million, more than triple profits in the same period last year. Fourth quarter revenue doubled to $14.2 million.
Sohu.com founder Charles Zhang is also throwing money and manpower into a new search site that will compete with Baidu. Microsoft (Research), which now claims only a sliver of China's search market, also wants to get into the game. But many analysts think Baidušs strongest competitor is the Chinese unit of Yahoo (Research), which now ranks third in the market for search.
Yahoo China is led by Jack Ma, an elfin 42-year-old former English teacher often called "the father of China's Internet." He launched China's first commercial Internet site in 1995, briefly worked at China's foreign-trade ministry, then returned in 1999 to Hangzhou, his hometown, to set up Alibaba.com, an online clearinghouse for Chinese suppliers seeking buyers overseas. He followed in 2003 with Taobao, an online auction site for consumers similar to eBay's.
The notion that Chinese firms like Alibaba will ultimately prevail over foreign rivals in their home market is a favorite Ma theme. He relishes boasting to foreign visitors that Taobao handles more transactions than eBay's China subsidiary, Eachnet, because it has a better sales force and a site design that makes more sense to Chinese users. (eBay says it's ahead of Taobao in attracting paying users. But after dismissing Taobao's strategy of allowing its site to be used free, eBay last year eliminated some China fees to bolster traffic.)
In August, Yahoo founder Jerry Yang and CEO Terry Semel agreed to fold Yahoo's China operations into Alibaba. As part of the deal, Yahoo put up $1 billion in exchange for a 40 percent stake in the combined venture. Ma, who now has complete operational control, has given Yahoo's China site a radical makeover, clearing away news and entertainment directories to highlight its search box. He promises to make Yahoo China the country's top search engine within three years and to use the Yahoo site to draw users to Alibaba and Taobao.