For a company that aims to be a global power in Internet search, Yahoo! (YHOO) has long suffered disappointment in China -- the world's No. 2 Internet market. After almost a decade there, Yahoo has never managed to become more than an also-ran in a field dominated by locals such as Baidu.com and Yahoo's Silicon Valley archrival, Google (GOOG).
Jack Ma promises to change that. Ma is the chairman of Alibaba.com, a Chinese e-commerce operator that last year took control of Yahoo's China operation. Before the Yahoo deal -- in which the U.S. company bought 40% of Alibaba for $1 billion -- Ma focused on his auction outfit, Taobao, and its competition with eBay (EBAY). Now he's turning to search, with a major overhaul of Yahoo's Chinese-language search operation that gives the service the stripped-down simplicity of Google and Baidu.
Ma admits he has some catching up to do. "Google is running, Baidu is running -- and we are still straightening our shoestrings," he says. But, he adds: "I'm very excited about" the race.
"HUGE DEMAND." That race is getting more exciting every day. Microsoft's (MSFT) MSN in early January launched a test version of its Chinese-language search engine. On Jan. 24, Google started offering its search engine from servers inside China for the first time, augmenting a service it had run on U.S.-based computers. Nasdaq-listed Sina.com (SINA), China's most popular portal, used to outsource its search to Baidu but last year launched its own service, called iAsk. And Sohu.com (SOHU), another Beijing-based, Nasdaq-listed portal, has done the same, with its new Sogou (the name means Search Dog) drawing growing numbers of users.
Why the interest? China's online population keeps growing, It now stands at 110 million, up 18% from a year ago. And while the market for search ads is still puny -- just $130 million, or less than a third of online advertising, and about 1% of total ad spending in China -- it grew by 88% last year, Morgan Stanley analyst Richard Ji estimates. For the next three years, the market will likely expand by more than 50% annually as small and midsize businesses turn to the Net for advertising, Ji predicts. Search "will outgrow every other online business" in China, he says. "There is huge demand."
Yahoo faces some pretty stiff competition in meeting that demand. Market leader Baidu is the world's fourth-most-visited Web site, according to Alexa.com, which follows traffic globally. Baidu offers services such as online search communities, where people can offer tips to one another on queries, and it's spending oodles on advertising to build its brand.
"MORE INCONSISTENT." Although Baidu's stock has dropped 63% since its spectacular Nasdaq initial public offering last August -- when its shares rocketed over 350% on the first day -- the company says it's ready to take on all comers. "I'm not surprised that lots of companies want to get into search," says CEO Robin Li, 37. But, he adds: "If you look at the history of multinationals, it usually takes them a long time to learn how to do business in China. Yahoo, seven years later is still trying. They haven't figured out how to do business here yet."
And Google's move into the mainland will make it a tougher competitor because it will allow the U.S. search giant to offer speedier search results. The downside to that is censorship. Even without its servers in China, Google felt obliged to remove content from its Chinese-language news site that was deemed offensive by the Chinese government. Now, Google will feel even more pressure from China's cybercops, who insist that companies operating locally censor items related to hot-button issues such as Taiwan, political reform, or the banned Falun Gong religious group (see BW Online, 1/25/06, "Google's Dicey Dance in China").
Google, though, insists its presence in China will benefit users there. "While removing search results is inconsistent with Google's mission, providing no information -- or a heavily degraded user experience that amounts to no information -- is more inconsistent with our mission," says Andrew McLaughlin, senior policy counsel at Google. With servers located overseas, "we were just too slow for Chinese users."
SALESFORCE BOOST. The more established players have some significant advantages over Yahoo, as well. In China, where many would-be advertisers don't have Net access themselves, companies need big sales forces that can fan out across the country and explain online search to skeptical business owners. Baidu has 2,000 people doing just that.
Google doesn't have that kind of salesforce yet, but it is making progress. "They are doing quite well building relationships," says Sage Brennan, general manager of Shanghai-based IT consulting firm Pacific Epoch Ltd. Alibaba has a sizable sales team that will likely give Yahoo a boost, but it may take some time to get them going.
While Baidu is the leader for now, and other Chinese players are coming on strong, Yahoo's biggest threat will likely remain Google. The $470 million that Morgan estimates Google spent on research and development last year dwarfs Baidu's $4 million. "In the search business, technology is more important," says Charles Chao, president of Sina.com. "I wouldn't be surprised if Google does much better in the future." Whatever the outcome, expect to see plenty of action in the race for search in China.
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