Baidu - Icarus in the Making?
Note: this post was
carried today on Wallstrip
Overview
Baidu is an awesome company. Their success in fending off, no,
actually trouncing, the likes of Google and Yahoo! at home is something
to behold. They have been at this six years and kicking some serious
butt in the process. However, now they are getting aspirational and
wanting to compete in far-flung markets against both global and
domestic rivals. They’ve got something really good going in China with
lots of organic growth on the horizon, but they are getting pushed to
go toe-to-toe with the Googles and Yahoo!s of the world. Making money
is not about ego and it’s not a bloodsport, its about using cool, calm
rationality to crush the competition. I’m concerned that ego might be
pushing Baidu towards sub-optimal expansionist behaviors, flying so
close to the sun that their metaphorical wings might melt. And it is
this conscious ascent challenged by forces of gravity that should be
watched very, very carefully.
China and Search - Why it’s a Unique Landscape
China has a culture and a control structure all its own. These
“terms of trade” have made it very difficult for foreigners to
effectively compete against Baidu’s local presence and influence. And
this is in addition to factors such as government regulations, language
barriers, cultural barriers, and nationalistic appeal that give local
providers the inside track against powerful offshore competitors. This
was clearly highlighted in a fascinating story in the Chicago Tribune:
With Li at the helm and the stock now trading around
$110, Baidu has built a dominant position. It has astutely designed
features that appeal to Chinese users, beat its competitors to market
and cast its most lethal opponent, Google, as a foreigner with
suspicious ambitions.Baidu’s none-too-subtle use of nationalism was on display in a
recent online advertising campaign. It didn’t slam Google by name, but
it featured a group of villagers accosting a foreign couple. “You don’t
understand us, you don’t understand us,” one village elder scolded the
outsiders. In a country with an ingrained distrust of outsiders, the
message resonated.Li, who was educated in the U.S. and helped design the pioneering
search engine InfoSeek, has no qualms about playing the nationalism
card. “We think search is not just about technology,” Li said. “It’s
also about language. It’s also about culture.”********************
Since it first became available in China in 2000, Google.com has
been plagued by sluggish performance and frequent breakdowns. Google
says Baidu gains an advantage because Chinese service providers
deliberately slow Google’s service. And any search terms deemed
politically sensitive–”Tiananmen Square” or “Dalai Lama”–slow the
service even more. Repeated efforts will sever the Internet connection.Chinese citizens need no explanations, of course. They know the
telltale signs of censorship. Since Google has no servers for its site
inside China, it is believed that sensitive Google.com queries get
caught by censors as they exit China en route to Google’s servers
outside the country–”the Great Firewall of China,” some have dubbed it.
Another interesting post further amplified the value of being inside the Great Firewall:
Partisans of Baidu, the main local search-engine company
(which is listed on NASDAQ and has Americans as its main investors)
recently ran a blog campaign touting it over Google. One illustration
was Google¹s supposed inability to return any results for searches on
³Nanjing Massacre² (or ³Nanking,² the older Western spelling) whereas
Baidu returned plenty. There was a technical reason”Google¹s servers
are outside China and thus must cross the government¹s ³Great Firewall²
to send results to users in China. The firewall routinely screens out
references to ³massacre,² as in ³Tiananmen Square massacre,² and so it
blocked Google¹s results. Baidu¹s servers and resources are all inside
the firewall, and have been pre-scrubbed to remove references to
Tiananmen and other prohibited topics. Google has since made
adjustments so that it too can report on Nanking, but the episode
showed the sensitivity of the issue.
The Rise of the Blogs - Baidu Beware
Another interesting point to note is the rising importance of blogs in China, a place where Baidu is currently not a big player:
Loverty made an interesting comparison in his blog post
today. Based on Alexa data, he compared the percentage of traffic to
blog service in overall traffic of China’s major internet portals,
including Sina, Sohu, Netease, QQ and Baidu.According to Alexa data, QQ’s Q-zone service is the most trafficed
service among all QQ’s services, it accounts for 19% traffic of QQ.
(including the sub-domain of qzone.qq.com and q-zone.qq.com).11% of Sina’s traffic comes from blog.sina.com.cn, which is the
third most traffic service in Sina, just after Sina’s very popular news
channel and sports channel.Blog service of Sohu is its second most popular service as well, accounting for 8% overall traffic.
Both Baidu’s Space service (hi.baidu.com) and Netease’s blog service
just contribute 1% traffic to their overall traffic respectively. In
Netease’s new homepage, which is launched today, blog service has been
emphasised, thus the traffic to its blog service is expected to
increase significantly in coming future.The data illustrate that blog service becomes more and more
important to China’s web portals. However, among all five portals, only
QQ has a viable business model of selling virtual items to its users to
decorate their q-zone. Therefore, for Sina and Sohu, how to monetize
these heavily trafficed blog service is an critical issue to deal with.
New Models of Search - Can Baidu Stay a Step Ahead?
Search in China appears to be a unique phenomenon. For example,
pay-for-placement is frequently viewed as unethical in the U.S. but
perfectly acceptable in China. However, paid search is rapidly being
viewed as the last generation, with social search as the next frontier
that must be achieved to stay ahead of the competition. This was
well-addressed in a post by Gordon Choi:
Baidu as a search engine, like Google, has built a
financially successful business around its paid search program, Baidu
Jingjia. In China¹s Internet search market, paid search is regarded as
the 3rd generation. However, Baidu is actively pursuing the next
emerging stage of search social search!Baidu CEO Robin Li recently explained, ³In the next couple of years,
social search in China will become very predominant. Search engines in
China at the very moment is at the 3rd generation - paid search. And
this is where Baidu is currently positioned and mastered.²Earlier this year, Baidu has already shown active signs of digging
into the social search area by launching some social verticals like
Baidu Post and Baidu Baike.I reckon the following are the 4 generations of Internet search in China:
1. The Keyword Count Generation: This is the pre-Google stage,
though in China it barely had existed. However in the US, those search
engines in the early years were very user-unfriendly in terms of search
results. All they did to rank search results was to count the number of
keywords (or keyword
phrases) entirely based on on-page factors.2. The Link Popularity Generation: This is when Google and PageRank were born.
3. The Paid Search / Sponsored Search Generation: PPC advertising
programs like Overture, Findwhat, Google Adwords, and Baidu Jingjia
emerged to become monetizing channel of the search engines.4. The Social Search Generation
So where does Local Search fit in? Maybe there is no place for it in China.
Manifest Destiny - Baidu in Japan?
Baidu recently announced its new Japan initiative, something that
has quitely been in the works since May. They have been accumulating
talent with pan-asian foreign language skills, preparing for their
assault on new markets. The China Tech Stories blog had the coverage of Baidu’s Japan and Vietnam expansion plans:
In fact, rumor has been spreading inside the industry
about Baidu’s ambition to expand internationally. Baidu has been
working hard on the domestic market for six years and has fullfilled
their goal to become the dominant player in China. However, comparing
with the giants Google and Yahoo, with both have products in dozens of
languages, Baidu is still small and weak.********************
“Time for Baidu to go out”, analysts opinioned. If Baidu intends to
become a search giant like Google, it is not enough to depend only in
domestic market. Having already built up a strong base domestically,
the time has come for expanding overseas.Nevertheless, Baidu will face the same culture barrier when they
enter the foreign market. At it’s IPO time, Baidu’s message to
Wallstreet was :”The search engine who truely understands Chinese
market”. Now preparing for entering foreign territory, it is yet known
whether Baidu will be able to fit into the local cultures quickly.
Exactly. It’s not easy breaking into a new culture, as Google and
Yahoo! know so well. So while Baidu has been massively successful at
home, whose to say that they won’t encounter Google-esque problems as a
newcomer to its target countries, say Japan? One mitigant is that
Japanese searches use Chinese character sets, something at which Baidu
has great expertise. These are smart people, to be sure.
So What’s Next for Baidu?
Baidu has been intensely client-focused while working to improve its
core search algorithms. Its decision to introduce the Combined Ranking
Index to its PPC algorithm has been hailed by several analysts as a vehicle for maintaining its leadership position and continuing its market dominance.
Baidu has changed its PPC (or Jingjia) algorithm since
11 Sep 2006 in which cost-per-click (CPC) is not anymore the only
factor in determining its PPC ad rankings. Baidu has introduced the
Combined Ranking Index to its new PPC algorithm which is determined by:CPC x Keyword Quality
The higher the Combined Ranking Index of an individual keyword, the
higher that keyword is ranked. Keyword Quality includes the following
factors:* Clickthrough Rate (CTR)
* Adcopy
* Landing Page
* Other Historical FactorsI believe obviously this is Baidu’s great advancement in terms of
its PPC ad platform. The change is inevitable as two other American
major PPC players MSN Adcenter and Ask.com Sponsored Listings have
already included CTR and some other factors into calculating PPC ad
rankings. By Q4 Yahoo Search Marketing (formerly Overture) will also be
doing the same via its new PPC platform, Panama.
Further, Baidu’s partnership
with Ebay will considerably benefit its market standing and improve the
deployment of products and services, while adding more customers to the
client base.
eBay recently announced to partner Baidu in China. The
agreement between Baidu and eBay China (eBay Eachnet) includes the
three major areas below:* Baidu is to promote Paypal Beibao, PayPal’s service in China, as
the preferred online payment mechanism on the Baidu Points platform.* Baidu is to become the exclusive provider of text-based search
advertising on eBay Eachnet. The testing of this text-based search
advertising feature is expected to start in Q1 2007 with the full
implementation in place by Q2 2007.* Baidu and eBay Eachnet are to develop a co-branded toobar. The
toolbar will let users to click on an eBay EachNet icon directly from
the Baidu toolbar menu and be redirected to eBay EachNet’s online
auction.
Conclusion
Baidu has made almost all the right moves in China over the past six
years. They have exploited their position as THE local search company
against their foreign competitors, used the structural advantage of
having their infrastructure inside the country as opposed to their
arch-rivals Google and Yahoo! and fully leveraged their local knowledge
of language, customs and tastes. In short, they have used every asset
at their disposal to kick the crap out of their competition. Bravo. But
it is hard for me to see how these winning strategies translate abroad,
where the terms of trade are different, the playing field level at
best, if not tilted in their local competitors’ direction. And I
haven’t even mentioned the real global threats, Google and Yahoo!, who
have been competiting fiercely abroad for years. So as good as Baidu is
in China, I am deeply cynical at their ability to make their strategies
and plans take flight abroad. We’ll see - but I’ll bet it will be a
turblent ride.
Thanks to Rob Passarella for his perspective, insights and research.
The author does not hold a position in the securities of Baidu.
