Google eyes China as Baidu fumbles

SAN FRANCISCO/SHANGHAI Tue Nov 10, 2009 5:11pm EST

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SAN FRANCISCO/SHANGHAI (Reuters) - In 2005, China administered a spelling test that asked respondents to spell "Google" for a search market report: only 60 percent took the test and more than 20 percent got it wrong.

Four years later, Google Inc (GOOG.O), whose whimsical name is synonymous with Internet search in much of the world, is still struggling for recognition in China, the world's largest Internet market by users where local rival Baidu Inc (BIDU.O) dominates.

Yet, Baidu's switch to a new advertising system, Phoenix Nest, may be the catalyst that boosts Google's market share.

Last month Baidu warned investors it will lose customers and post lower revenue than expected in the upcoming quarters due to the switch.

Analysts say Google could capitalize on Baidu's disruption, but note that the U.S. company needs to more broadly revise its strategy and align itself with local companies to gain on its search rival in China.

"For whatever reason right now, the brand just doesn't have the same cachet (in China) that it has here," Broadpoint AmTech analyst Benjamin Schachter said of Google in China.

Revenue from China is just a fraction of Google's roughly $22 billion in annual, worldwide sales, analysts said. But the country's massive population and fast growth make it key to the future, particularly as growth slows in mature markets like the U.S., where Google already has a roughly 65 percent share.

Google has overtaken many of the other search companies in China, including Yahoo Inc (YHOO.O), growing its share of China's 2 billion yuan ($293 million) search market to 31 percent in the third quarter. But Google has been unable to crack Baidu's share of the market, which stood at 64 percent share in the third quarter of 2009, according to Analysys International.

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Change at Google's China business has already come at the top. In September, Google appointed its head of sales, John Liu, to take over former China chief Lee Kai Fu's business responsibilities.

Liu told local media in September that he intends to double Google's sales force in China in six months, although he was not more specific. Baidu already has a sales and customer service team of over 4,000.

Google has also beefed up its ranks of engineers with a focus on making the search engine better-suited toward Chinese language Web content. It was not immediately clear how many people Google employs in China.

At a recent roundtable discussion with reporters in Boston, CEO Eric Schmidt said the quality of Google's search results in China is now on par or better than the competition, in terms of speed and relevance, according to internal tests.

Still, some Chinese users say Baidu, whose name is taken from an ancient Chinese poem, has better contextualized search results. For example, typing in "Power Station" in a Google China search will give hits on what a power station is, whereas on Baidu, you get links to news articles and songs by the Taiwanese band Power Station.

MUSIC AND DEALS

The fundamental problem with Google in China could be as simple as that the company is not Chinese, analysts say.

The world's most populous nation only started liberalizing its economy in the 1980s and has traditionally favoured Chinese brands in its sensitive media sector because they are easier to police than their Western counterparts.

While some analysts maintain that China's thorny regulatory environment is a challenge for both Western and Chinese companies alike, local firms have operational advantages that let them react faster to market conditions.

"Local companies can execute on crucial strategy and tactics without having to get the go-ahead from headquarters across the Pacific," Kaiser Kuo, a China Internet commentator and the former director of digital strategy at Ogilvy China said in an email.

Google likes to boast that founders Larry Page and Sergey Brin still vet every new hire. But in overseas operations like China, that can mean a lack of autonomy that can create bottlenecks, said Sanford Bernstein analyst Jeff Lindsay.

The answer might lie in partnerships. In March Google struck a deal with Chinese music site Top100.cn to offer up to 1.1 million licensed songs through the Google search engine.

The deal addressed a fundamental shortcoming of Google's, whose policy of blocking access to pirated online music hurt its standing among China's music-obsessed Web surfers.

JMP Securities analyst Sameet Sinha said Google could buy a Chinese Web firm to boost its standing in China, though he noted that valuations are high.

"Everything is booming over there," said Sinha

(Reporting by Alexei Oreskovic and Melanie Lee, editing by Tiffany Wu and Derek Caney)

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