I recently wrote an article about Baidu (NASDAQ:BIDU) in which I questioned their attempt to break into the Japanese market in order to cater to the demands of Wall Street. When that article came out December 6th, Baidu’s stock price sat at $126.57 USD a share and climbed as high as $134.10 USD on January 11th. Since then, Baidu’s stock price has plummeted, closing Tuesday at $97.85 USD a share.
I hope that you took my advice, as many of our hedge fund clients did, when I wrote in that article:
For investors, I think that Baidu will maintain its share price and bounce up slightly in the short-term, like another darling of Wall Street analysts which I have written about, Focus Media (NASDAQ:FMCN). But long-term, I think that Baidu, like Focus Media, will have major difficulty living up to the expectations of Wall Street analysts. Moving into Japan is not the answer.
The problem is not that Baidu is not well-run or not doing well in China. They do dominate the search market and the management team has been savvy enough to move into new potential revenue streams like virtual currency.
The problem is that many investors are looking at Baidu as the Chinese version of Google (NASDAQ:GOOG) and want to make sure they do not get left out in China as they might have done after Google’s IPO. But the hard truth is that it is very difficult for Chinese companies to generate the kind of revenue streams that Google can in order to maintain such sky-high valuations. That is why Baidu and even Alibaba (NASDAQ:YHOO) has announced plans to move into Japan.
Google’s Problems in China: Oddball Hiring Practices
Previously, I also called attention to some of the problems that Google must overcome in order to be a long-term success in China’s browser market. Again and again Google has found itself at the mercy of Baidu, with only a 20% market share in surveys my firm conducted in Shanghai with Chinese youth. This has left investors dazzled with Baidu – someone has actually been able to stop the Google train.
But I argued in that article that Google’s problems are fixable which should leave investors in Baidu cautious. Google needs to change their absurd hiring practices, which delays initiatives in China, and localize their products for the Chinese market. If they do not, then they will certainly lose to Baidu.
Many pundits have already sounded the death knell for Google in China. However, Google has unleashed some services in recent months that indicate it will not concede China’s browser market and that those calls were made prematurely. With new talent finally on board, its China management team has released some new China oriented features such as the input method editor or IME that made worldwide headlines when Sohu’s (NASDAQ:SOHU) Sogou claimed that Google had stolen its input system.
The Sogou Controversy
On April 4th Google released Google pinyin, a language IME that allows users to input Chinese characters into documents and web applications using pinyin, the Romanization of Chinese characters. IMEs are nothing new; there are hundreds of different programs. What sets Google pinyin apart is its ability to intelligently predict what someone wants to type based on a database of millions of queries plugged in to Google search.
Unfortunately for Google, shortly after the release of version the program’s first version many users noticed striking similarities to another popular IME released by competitor Sogou in the summer of 2006. In Google’s first version several input mistakes mimicked mistakes in Sogou’s IME suggesting that Google lifted some or all of the vocabulary database that Sogou had created.
Google’s first response was silence and online commentary on blogs and BBS strongly denounced Google’s actions. BBS posters made comments like “Google should leave the input industry,” and “Google, you disappoint me.”
Google ultimately issued a statement on April 9th that the experimental version of its Pinyin IME contained unoriginal data but that a subsequent update had dealt with any issue of copied material. Sogou’s response is that Google should suspend operation of its Pinyin IME service because intellectual property rights were violated. At this time Google is sticking to its guns and the service remains functional.
The real issue for Google is one of public perception and whether or not its users are affected. Many skeptics of Google’s chances has said that their screw-up in China will further send Chinese youth to Baidu.
Quieting the Crowds
But public outcry against Google seems to have died down. Several of my firm’s analysts have been monitoring blogs and BBS to track consumer opinion. As one netizen blogged, “In fact domestic enterprises should learn from this apology… Google was courageous to apologize”. In a similar vein, another poster wrote “Google has apologized, let the issue go.” Other netizens pointed out that similarities between the programs, including the phrases that seem copied, actually make sense because web language is full of odd seeming but common phrases”.
Nationalistic vitriol directed against foreign companies such as Google will continue. Ultimately, though, Google’s ability to introduce useful functions for Chinese netizens will determine the company’s fate in China.
Sogou may decide to campaign hard for a lawsuit but unless they do a lot of work to incite nationalistic feelings against the outsider Google then Google will have dodged a bullet. Investors interested in Google’s fortune in China may want to pay close attention to future efforts by Google to provide services that Chinese consumers desire. Despite past missteps Google is making the changes needed to claw its way back in the race against Baidu in China.
If it does, then investors in Baidu should pay close attention to its share price.
CMR analysts Ben Cavender, Sarah Jia, and Anna Li in Shanghai contributed to this article.