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Google's (GOOG) confrontation with the Chinese government has been very good for investors in local rival Baidu.com (BIDU). The Beijing-based, Chinese-language search engine's Nasdaq shares have jumped 54% since Jan. 12, when Google first announced that it intended to stop censoring search results in China. With Google now following through on its threat and redirecting traffic to its Google Hong Kong service, where it doesn't need to censor its results, analysts say that the U.S. giant is likely to become little more than a niche player in the Chinese market.
"We expect access from China to google.com.hk to be at best, slow," wrote Goldman Sachs analyst James Mitchell in a Mar. 22 report, "and at worst, unavailable."
Google's exit brightens an already bright Baidu picture. With its only serious rival having hobbled itself, Baidu will now enjoy near-monopoly status in China's Chinese-language search category. Of the company's remaining competitors, "none of them has over 1% market share," says Paul Wuh, an analyst in Hong Kong with Samsung Securities. That puts Baidu in command of a small, but fast-growing market. Spending by advertisers on search in China totaled just $1 billion in 2009 and will be worth $4.9 billion by 2015, he estimates. Almost all of that will belong to Baidu, says Wuh, who expects the company's market share to jump from its current 65% to over 90% within two years.
For now, most companies interested in doing online-search advertising in China will have no choice but to use Baidu, says Arlene Ang, Singapore-based regional managing director with Publicis Modem, the digital arm of Publicis Advertising. "I just don't see who else is big enough to take over that spot" vacated by Google, she says. "There are smaller ones but they don't have the reach."
Not everyone is convinced that Baidu has the market locked up, however. "This is an opportunity for everybody to ramp up their market share," says CLSA's Hong Kong-based analyst Elinor Leung, "so everyone will try." Clients don't want to put all of their online advertising budgets into one company, says Chris Reitermann, president in Beijing of Ogilvy One, the digital arm of Ogilvy & Mather. "You will see one of the other search engines over time definitely become more prominent and take part of Google's revenue."
Industry analysts point to several companies that might succeed. Microsoft's (MSFT) Bing is one. The young search engine has yet to make a dent in China's market and—like every other contender operating in China—is legally obligated to self-censor. Among the local players is Sohu (SOHU), a popular Beijing-based portal that has a search engine called SoGou, or Search Dog. A further contender is Tencent (700:HK), which operates the massively popular QQ instant messaging service and has a search service called SoSo. The Shenzhen-based company's shares trade in Hong Kong and have tripled in the past year, giving Tencent a market capitalization of $37.4 billion. That's 81.5% higher than Baidu's Nasdaq-listed shares. "People have a lot of hopes for Tencent's search engine because they have the traffic," says Leung.
Another local company that might be able to challenge Baidu in search is Alibaba (1688:HK), parent company of Hong Kong-listed business-to-business site Alibaba.com, as well as privately held consumer site Taobao. Company spokesman John Spelich won't comment on whether Alibaba—which is 44% owned by Yahoo! (YHOO)—has plans to boost its search business now that Google China has vacated the market. However, he says the company's Taobao has an edge over Baidu in attracting online advertisers. "The overwhelming majority of our users come with purchase intent, while the majority of Baidu users come looking for free music or entertainment," Spelich says via e-mail. That e-commerce base "gives us much more of an advantage when tailoring advertising solutions to help companies reach the right consumers."
Eventually, a competitor of Baidu's might move into the space vacated by Google in the search market. Building a search engine is a tough job, though, especially when one company is so far ahead.
"I do expect one or two of them to emerge, but it will take some time for them to catch up with Baidu," says Vincent Kobler, managing director of EmporioAsia Leo Burnett in Shanghai, which works with multinational clients such as McDonald's (MCD), Coca-Cola (KO), and Procter & Gamble (PG), as well as Chinese retailers such as Li Ning (2331:HK) and Belle International (1880:HK). How long will it take before another search engine can match Baidu? "At least five years or more to really reach scale," says Kobler. Until then, he says, "we're directing most of our clients in Baidu's direction."