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Google (NASDAQ:GOOG) vs. Baidu (NASDAQ:BIDU). This has been and continues to be an interesting battle between the hometown favorite and the global titan, with the hometown hero decisively winning the first few skirmishes with the global godzilla waking up from its slumber and getting down and dirty, real fast.

I had written about some of the good and bad at Baidu back in December, and many of the issues I had raised almost three months ago are still in play today. However, it appears that Google's persistence, ability to listen and learn and long-term focus has caused it to rapidly close the gap, posing a real threat to Baidu in its home market. Further, some Baidu missteps are hampering its own efforts to continue its meteoric growth in China and to maintain its hometown advantage. So while many have seemingly crowned Baidu the victor in China, well, let's just say that I'm not so sure.

And it is important to keep in mind that as China continues to inch ever closer to the West, whether it is due to the image it wants to portray in advance of the Bejing 2008 Olympics or the position it would like to secure on the global economic and political stage, this can only work to Google's advantage. Superior technology, global footprint, vast financial resources, long-term view, "Do No Evil" ethos resonating with the leading edge of the Chinese Internet denizens - all of these speak to an ascendant Google in China even as Baidu is the nationalists choice for search. Bottom line: China's 140 million Internet users are smart, savvy and want the best. And no amount of nationalistic feeling will keep them from using the superior tool. And this tool, my friends, is likely to be Google.

Google - China is a Tough Place to Play

baidu and googleIt is hard getting your teeth kicked in repeatedly, as Google's were for much of 2006. Look at the tone of this post on the Google Blog from about a year ago (01/27/2006):

Google users in China today struggle with a service that, to be blunt, isn't very good. Google.com appears to be down around 10% of the time. Even when users can reach it, the website is slow, and sometimes produces results that when clicked on, stall out the user's browser. Our Google News service is never available; Google Images is accessible only half the time. At Google we work hard to create a great experience for our users, and the level of service we've been able to provide in China is not something we're proud of.

This problem could only be resolved by creating a local presence, and this week we did so, by launching Google.cn, our website for the People's Republic of China. In order to do so, we have agreed to remove certain sensitive information from our search results. We know that many people are upset about this decision, and frankly, we understand their point of view. This wasn't an easy choice, but in the end, we believe the course of action we've chosen will prove to be the right one.

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We're in this for the long haul. In the years to come, we'll be making significant and growing investments in China. Our launch of google.cn, though filtered, is a necessary first step toward achieving a productive presence in a rapidly changing country that will be one of the world's most important and dynamic for decades to come. To some people, a hard compromise may not feel as satisfying as a withdrawal on principle, but we believe it's the best way to work toward the results we all desire.

They know what they've gotten themselves into. And yes, they took a ton of crap for agreeing to work with the Chinese authorities to filter certain "objectionable" content from their search results (how does this follow the "Do No Evil" code?). But as forward-thinkers and as capitalists, they understood that they simply couldn't cede one of the largest and influential Internet markets in the name of a rigid set of principles. Things change, situations evolve, and being flexible without "selling out" (at least to yourself) is both very emancipating and very smart - certainly for Google's shareholders.

But hey, a year has gone by and Google has made terrific headway in China. Having a significant local presence has done them right, taught them a lot and much of the negative press associated with their decision to filter pursuant to Chinese Government demands has gone away. Now it is Google and Baidu. And even as the China opportunity is largely untapped (with less than 10% penetration of the population), Baidu is looking elsewhere for growth. And this is because...? Good question.

Baidu - In the Lead, But Distractions Abound

Baidu is the leader in what likely represents the largest and most rapidly growing search market on the planet. Then why is it in such a rush to diversify away from its home market? I asked this question back in December and still haven't gotten a good answer from the Internet or anywhere else. Consider this recent post from irreverent stock list from 02/17/2007:

They are now trying to expand into Japan, but why? If China offers so much opportunity for growth, why not try to maximize their presence there first and then consider expansion into Japan? The capex expansion just to establish its presence in Japan is ludicrous! Do I have to remind everyone that China and Japan aren't exactly best buddies? In addition, search market in Japan will be a hard nut to crack with Google and Yahoo already having presence in that market. So why are they doing this when their revenue is now declining in China? The PE of 138.90 is based on the premise that they can continue to grow their earnings. This does not seem to be the case.

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What does all this mean? I expect that earnings will taper off as a result of this within the next 3 quarters and with continued competition from SOHU and Google, it will only get more difficult to grow. The Chinese internet adoption rate is at its early infancy with less than 10% of the population penetration. Perhaps that is why they are trying to enter Japanese market for additional growth. To me, it just doesn't make much sense.

Hmm. Good questions. From the Japanese side, there has been an initiative to try and develop a local search engine catering to Japanese web users, but as this is being spearheaded by a Government agency [METI] the results have been predictable - none. That said, an interesting post from the Japan Economy and News Blog from 02/16/2007 highlights the incredibly competitive environment in the Japanese search market:

Back in December of 2005, Japan’s Ministry of Economy, Trade and Industry organized a study group comprised of about 20 Japanese electronics companies and universities, which was supposed to consider the merits of creating a search engine designed specifically for Japan’s Web users. Asia Media reported that the study group would include such giants as Matsushita Electric Industrial (Panasonic), Hitachi, NEC and Fujitsu, Nippon Telegraph and Telephone and public broadcaster NHK.

Also at that time, the Nihon Keizai Shimbun reported that Japan’s effort would be aimed at competing with Google. That interested me, since Yahoo is by far and away the search/internet portal market share leader in Japan. Google, of course, is the company that everyone thinks of as being cutting edge. Oh yeah, and Google makes heaps of money.

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Yesterday, Baidu announced that its quarterly profits had quintupled, and that it would continue with plans to invest $15 million to get the Japanese version of its search engine up and running.

Baidu, of course, is aware of the difficulties involving such a project. As Shaun Rein, managing director of Shanghai-based China Market Research Group, put it:

There are a lot more embedded competitors in the Japanese market than in China [when Baidu got started]. [In China,] Baidu wasn’t really competing against anyone with a strong position. [In Japan,] Baidu is going against people who really know the local market.

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The next few weeks should be interesting. Will the possible entrance of a Chinese competitor finally inspire METI to get its act together and get a project running? Is it possible to retain the flexibility needed to run a successful search engine while attempting to enlist 20 organizations to cooperate? Or - and this is what this observer is hoping for - will a Japanese start-up enter the fray and attempt to brand itself into the Japanese source for search?

Large, well-funded, embedded competitors. Substantial cultural barriers. Seemingly massive growth opportunities in its home market. Why is Baidu doing this? Do they see their own weakness and rising threats on the domestic front? Or are they simply making the classic error of overconfidence by extrapolating their home-market success into foreign markets, and straining both managerial and financial resources in the process? Either way, the prognosis is not good. Something just doesn't add up.

China - Censorship is a Way of Life

Regardless of how much progress China appears to be making in dealing with the West, the issue of censorship continues to rear its ugly head. From Adotas 01/24/2007:

At a session of the Chinese Communist Party’s Politburo, President Hu Jintao called for better regulations for Internet content to ensure the development of a “actively and creatively nurture a healthy online culture,” according to the government’s news agency.

Faced with a rapidly increasing Chinese online population, President Hu called on the government to use new technology and techniques to influence public opinion and improve Internet security. According to the Shanghai Academy of Social Sciences, in two years, China could house the largest number of Internet users in the world, surpassing even the United States.

China’s Internet population increased by 23.4% in 2006, according to the state-run China Internet Network Information Center. Meanwhile, the Agence-France Presse reports that the US audience has grown only around 2%. “The growth now is gaining much momentum. We’re expecting even faster growth in 2007 and 2008,” said Information Center director Wang Enhai in an interview with the government-owned China Daily newspaper.

See those growth numbers? And off a pretty large base to begin with. Stunning. More on censorship.

From Baidu.com 10/18/2006 - Does Baidu have the right to delete users' articles?

The most important thing that I was working on was suddenly deleted earlier and there was no basis for your deletion. We understand that you are entitled to delete political criticisms, but you have exercised too much authority by deleting the other articles.

From Daai Tou Laam 02/15/2007 - The Sentence Overlooked

The professors weren't protesting CCP censorship as an abstract evil. The professors seemed to understand and accept the expected boundaries of CCP censorship. It was only when blog posts that should have made it in to print in the mainland press were deleted without notice, that they started to protest Sina's actions. It was when the censorship crossed from clearly defined boundaries in to an unclear haze, that writing and decision making about what to write and the process of censorship became untenable. It was when news topics would disappear from the public dialogue like purged Soviet Politburo members from photos, that censorship became "a behavioural code on the internet" that was unacceptable.

This is an issue that just won't go away and impacts all competitors in the Chinese market, not only those based on foreign shores.

Baidu - Funny Business Just Isn't Funny

There are a wide array of feelings towards Baidu inside of China. First, the positive:

From Baidu.com 12/18/2006 - Support Baidu, No Google

Please support or own Baidu and keep Google out of China. Google has tons of advertisements and the company deducts a premium from web owners. This victimizes those who advertise, unlike in Baidu which does not practice malicious competition.

Uh huh. There have been lingering concerns around Baidu's search results, especially when compared with Google. I had written a post about this back in August, when Baidu was subject to scrutiny in the wake of a click-fraud scandal. Here is an extract from that post concerning the alleged manipulation of search results:

Yet another interesting topic is the potential manipulation of search results. Remember that Office Space reference above? Well, Baidu fired 45 employees in two hours in a fairly uncermonious fashion. One such employee actually recorded their interaction with Human Resources and the translated transcript can be found here. This isn't so bad - every large company has their Vault-posted nightmare HR stories. What I found particularly interesting is that a friend of mine in China ran a search on this issue in both Baidu and Google with vastly different results - Baidu came back with only about 6,700 returns, while Google's count was closer to 45,000 (that's not a typo - we're talking 7x the number of Baidu). I am also told that Baidu generally does better on these types of searches than Google. So what's going on here? Good question, but the implications are certainly not good.

Could it be that Google is creating an open, fair, understood market, while Baidu is still battling with unfair and opaque business practices? There is a bunch of data out there, both new and old, about Chinese Internet users who are enraged by Baidu's Pay for Placement Bidding Service [BPPS] and how it is used to manipulate search results.

From an angry Chinese poster dated 01/13/2007 who complained that his website was screened out because he refused to join BPPS - Strongly against Baidu!

Our website www.ldf.owner.com has been operating for five years and the hits have been relatively stable. We refused when offered by Baidu as we intend to promote competitive bidding. Later on we found that our website recorded sharp falls. What was originally includedin the more tan 10,000 pages have now declined to five pages. Baidu is really unfair!

From Interfax.cn dated 02/02/2007 concerning the pay-for-placement issue

Shanghai. February 2. INTERFAX-CHINA - Canada-travel.cn has appealed to a higher Beijing court in a case involving Baidu's pay-for-ranking service, the Web site's lawyer said.

The ruling in the case is expected to set a legal precedent in the search engine business, and bring some common agreed-upon rules to the industry.

Canada-travel.cn is a customer of Baidu's bid for placement service which gives listing priority to sites that are willing to pay. Usually a site purchases ten or more keywords from Baidu, and its name will appear on top of Baidu's search results list.

According to Zhang Lurong, the site's lawyer, Canada-travel.cn was within the top 10 or even the top 5 until the end of 2005. But in March 2006, the site's ranking fell dramatically.

"The link appeared after the 70th page of the search results. Often, it wasn't even in the top 1,000," said Zhang. "However, we checked the rankings over the same period on Google, Yahoo, Zhongsou and Yisou, and none of those had changed."

"After their ranking dropped, Canada-travel.cn received calls from a Baidu salesperson asking them to buy another ten key words," said Zhang.

After the site complained to Baidu, the search engine "suddenly" adjusted the ranking to its former level, with an official reply citing many reasons why a site might be banned, such as spam links.

However, the company felt the abnormal ranking was a malicious activity Baidu conducted in order to profit from its bid for placement business. Therefore, they sued Baidu in September, accusing Baidu of unfair competition and seeking compensation of $12,810.

"Many small sites encountered this situation before. They came to me and tried to sue Baidu, but it's hard to acquire evidence," Zhang said. "This site's situation was special because Baidu later recovered the site's ranking. We saved the comparison and did notarization.

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However, to date, 8148 people have registered on fanbaidu.com, the official site of an anti-Baidu alliance joined by angry site owners, mostly owners of less well-known small and medium sites.

Many of these members said their sites were banned by Baidu because they were unwilling to pay for their rankings.

Huo Xiaochuan, the director of Baidu's customer service department in Shanghai, said he never received such complaints, and he refused to comment on the anti-Baidu alliance.

However, the owner of several sites, Mei Xiaoming, said he complained to Huo directly many times.

"I kept all the evidence about the ranking changes. At first, Baidu staff denied it but finally they admitted. But they attributed the reasons to other departments in the company, so until now, the ranking of my site has not been recovered," said Mei.

We'll see how Canada-travel.cn fares in court, but in the court of public opinion this is not a good fact pattern for Baidu. And these are serious problems that were cited over seven months ago. And it does not appear that Baidu is in any way admitting responsibility. This form of denial in the absence of evidence is generally not successful in a web-enabled world, a world which has now found China and represents a body with a voice - a loud voice that can vote with clicks and their yuan.

02/06/2007 - Comparison between the search results of Google and Baidu

Google puts page rank into consideration when searching, unlike Baidu which generates lots of results but mostly garbage.

02/08/2007 - Baidu announces to launch data service but some experts questioned its justice

Baidu launched "Press" mainly for their own publicity. Baidu's fairness was questioned as it gains rom the advertisements' pricing and not the business owners who advertise.

02/07/2007 - The search results of Baidu are exaggerated

Baidu's massive search results have a problem, there is improper handling of search results. Some are subjective and signify unfair competition.

This kind of chatter coming from home-market users is clearly not a positive indicator. It is not so much the issue of complaints (I mean, what successful business doesn't have complaints?) but the nature of the complaints - fairness, lack of transparency, dishonesty. These are worrisome trends that do not seem to be abating. What this means for Baidu's competition with Google is unclear, but it certainly can't be good.

Google - Getting Serious, Getting Some Props

Though not the home market leader, Google is getting some positive recognition in Chinese Internet circles. Part of this is undoubtedly due to some degree of "Westernization" happening within China, a more business-oriented, savvy mind-set and an increasingly open mind as it relates to all things Western.

From Zunch 02/13/2007 - Google Piles on Features in Asia

Google is adding maps and word processing services to its Chinese site in its ongoing fight to grab a bigger share of the search engine market in China.

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Whether the average Chinese citizen will switch to Google remains to be seen. As evidenced by its marketshare, over half of all Chinese currently prefer Baidu. But don't count Google out.

As the Internet continues to shrink the world (so ot speak), expect the Chinese to become more trusting of Google. Especially if they happen to be a Chinese company wanting to do business with Western nations.

From Meta 02/09/2007 - An Open Letter to Google Founders - to save Google in China and save Internet in China

Google is not alone. There are still several millions Google fans in China, especially those bloggers who are more real time intelligent to outside world. If Google do good as they did in early days. There will be more supporters for sure. Google is not playing a game of itself. You may under-estimate that before with limited information sources. People here are looking forward that you can pick the three suggestions(or partly) as China strategy in the coming years which can keep Google's "non-evil" motto alive in people's mind. It will also benefit to Google's business in China. It will be also benefit to the whole Internet neutrality in China. All the Internet users will appreciate that eventually.

All of all, the pure the better; the more compromise, the worse.

All I can say is, WOW. This is one passionate post. And he is right; Google is not alone. Many in China appear to view Google as legitimate and attractive alternative to Baidu. This positive momentum really started at the beginning of 2006 in the wake of Google's admission of its lousy performance in China. It needed to be more local. It took steps to do exactly this. And it paid dividends during 2006. And it appears that those dividends are only getting larger over time.

Conclusion

Google vs. Baidu is shaping up to be a real fight, not the way it appeared only a year ago. Google has scraped itself off the mat, put in its mouthpiece, inhaled some smelling salts and is girded for battle. Given its business model, its culture, its its push to be local, its financial resources and its commitment to win in China, it is hard to bet against them. Baidu has a massive lead and the hearts of a large portion of the Chinese Internet community, but the long-term battle will be won on the basis of performance and trust. And right now, it appears that Baidu is having some serious problems. Serious. Problems.

Source: Can Baidu Survive Google's Ferocious Uppercut?