Calinoff: Google as Also-Ran

Foreign Policy's Jordan Calinoff profiles Baidu (BIDU), the Internet search firm that controls 70% of China's search market - at the expense of Google (GOOG). How did the start-up outsmart the world's leading search engine?

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."

Comments

[modelportfo...:]

Seems to me that Google could have done better at some things in China (and recent departures and turning over new management leaf implies some fault), but blatant interference by Chinese Government in favor of Baidu and against Google plays a large part IMO. I have met Baidu management and they are certainly no smarter, just politically connected. Baidu's reputation also built on illegal music downloads, recently addressed by Google in joint venture with CN100. US Government should make it very clear to Chinese counterparts that continued interference will cost Chinese when it comes to trying to acquire US companies.

Oct 01 05:07 AM