Baidu: Strong IPO, Stronger Rivals?


By Bruce Einhorn Move over, Shanda Interactive (SNDA). The Shanghai-based operator of online games was a favorite of American investors in 2004, following the company's Nasdaq IPO in the U.S. With China's population of Internet users soaring, Shanda became the best-performing Nasdaq stock last year, thanks to fund managers and other investors looking for companies poised to cash in on the growth of the Chinese Web market.

Now Wall Street has a new Chinese favorite. Baidu.com (BIDU), which operates China's most popular search engine and styles itself as a wanna-be rival to global powerhouse Google (GOOG). The shares began trading on Nasdaq on Aug. 5 after the outfit raised $109 million in its IPO. According to Bloomberg, Baidu priced its shares at $27, well above the range of $23 to $25 that it had expected. At the end of its first trading day, the shares closed at $122.54 (a gain of more than 350%). Investors are betting the inflated price is justified since Baidu is in the best position to take advantage of a demand boom among Chinese Net surfers.

With such an explosive performance, Baidu's debut is very 1999. And just as the dot-coms that rocketed upward in those days of the Internet bubble quickly fell to earth, Baidu is getting a big short-term boost from investors who have fallen in love with a good story.

ROLE MODEL AND RIVAL. In Baidu's case, the cause for the exuberance is the booming Chinese Internet market. The country has over 100 million people online, making it the second-largest Internet market worldwide, behind only the U.S. And there's plenty of room for more growth. In the first half of 2005, the market expanded 18%. And the number of Net users is still tiny compared to the number of Chinese who use cell phones -- over 360 million. Many of those people use their cellular handsets to access the Net, providing Chinese dot-coms with an even bigger audience than just those who stick to PCs.

Baidu stands a good chance of winning big as all those Chinese Net surfers look for help navigating the Web. But amid the hype surrounding the Baidu IPO, it's worth remembering that the company is going to face a lot of obstacles, too.

The most obvious one is competition from Baidu's role model, Google. Ironically, Google is a minor shareholder in Baidu, having taken the stake last year. That investment might once have been meant as a stepping stone to a bigger Google stake in the Chinese concern, but now it seems that Google has other plans. A latecomer to China, it has finally opened a Chinese office and is trying to hire a top Microsoft (MSFT) China executive to run its operations there. That plan might need a revamp, though, since Microsoft has filed a lawsuit in the U.S. to prevent Google from recruiting its former employee.

CROWDING THE MARKET. Google might be off to a slow start in China, but it clearly has the brand and the technology to leap ahead quickly. Even now, without trying very hard to build up its Chinese service, Google is one of the most popular search engines among Chinese Net surfers. Once Google gets its act together and makes a big push in China, which no doubt it will, Baidu will have its work cut out responding to the threat.

While Microsoft is trying to stymie Google in China, Bill Gates may turn out to be another big competitor to Baidu. MSN, the Microsoft portal, earlier this year launched a joint venture with an investment company in Shanghai that's run by Jiang Mianheng, the son of former Chinese President Jiang Zemin, and it probably won't be long before MSN becomes more aggressive in trying to lure away users from Baidu. Yahoo! (YHOO) is a threat, too, thanks to its acquisition of a Chinese search engine in 2003.

Further crowding the market are the local portals. Companies like Sina.com, NetEase, and Sohu were among the first group of Chinese dot-coms to go public, listing on Nasdaq in 2000 just as the Internet bubble was bursting. They have thrived by selling services to users of cell phones, delivering content from Web sites via short messaging services. Because Beijing has been worried about the delivery of porn or spam via SMS, the portals have been looking for ways to diversify. Search is one option. For instance, Sohu has launched a new search engine called Sogou.com, and Sina launched a rival search tool in June.

SHAKE-UP AHEAD? Then there are the newcomers from the next wave of Chinese dot-coms. They include companies like Shanda that have grown by offering one type of service but are now expanding across the Net in all directions. For instance, Shenzhen-based Tencent is a Hong Kong-listed company that operates China's most popular instant-messaging service, which goes by the brand name of QQ.

Tencent is not sticking just to instant messaging, though. It wants to be the main home for China's Net surfers and has started offering Internet games and Web telephone service. It recently started selling online music. And Baidu investors should take note: Tencent in February announced a partnership with Google to offer the American company's search services to the Chinese outfit's users as part of its QQ instant messaging as well as the QQ.com portal and Tencent Traveler Internet browser. Talk about one-stop Web service.

Competition could heat up even more. Even newer companies are also looking to grab a piece of the online advertising market. Most notable are businesses such as Bokee and Blogcn -- blogging portals that are also competing for advertisers' attention (see BW, 8/8/05, "Blogs Under Its Thumb"). Maybe China can accommodate all of these would-be search powers. More likely, a shake-up is looming.

Baidu has successfully grabbed attention from Chinese users and foreign investors. But as the market gets more crowded, keeping them interested may prove to be quite challenging. Einhorn is a correspondent in BusinessWeek's Hong Kong bureau


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