Houston Community News >> Internet Search Engines Battle Over China's Growth

10/29/2006 Shanghai-

Baidu is fundamentally a good stock to own, in the longer term. It is a pretty well-run company, Internet growth in China is still strong, and Baidu's popularity is growing among the newest and youngest netizens. Google's search technology may be more robust and its product offerings more sophisticated and sexy, but Baidu has demonstrated that it is more in tune with the wants and needs of the majority of Chinese Internet users.

Recent gains by Google's stock may make Baidu even more attractive in comparison, from a valuation perspective. While Baidu's business represents a small fraction of Google's, Baidu is growing fast in one of the fastest-growing sectors in one of the fastest-growing economies in the world, which has to count for something.

There are two Chinas, in Internet terms, at least: urban, well-connected, well-educated, bigger-spending users who tend to be in the vanguard, and everyone else -- kids in third tier cities, college students, farmers, etc.

In the past few years, we have seen the first group of users tending toward Google's search engine and Microsoft Corp.'s MSN Messenger, while the less sophisticated group has latched onto Baidu and Tencent's "QQ" instant messenger.

But we are also starting to see users frequenting different search engines for different purposes; Baidu "crawls" a smaller portion of the web, for example, and therefore has fewer search results that link to foreign sites that are distracting for less-sophisticated searchers.

Don't count Google out, by any stretch -- they are still just getting started in China, after all, and I would surely hold Google in my China portfolio. But in the race to retain users, Google has some catching up to do.

Baidu also is staring directly at some significant threats. Fake mp3 searches, soaring click fraud, complaints from advertisers about keyword advertising policies and other legal issues will keep them busy. It sounds a bit like stating the obvious, but China's Internet users, in general, have different interests and obsessions from those of western users, and Baidu answers their call with offerings that fit. Entertainment and communication are the keys to China's Internet, given that other media in China provide a generally uninspired selection of entertainment options, and the Internet is very amenable to the somewhat conservative communication style of typical Chinese consumers.

Baidu has long been a leader in searches for illegal copies of digital music, for example, and is now making some moves toward legitimacy with a recent partnership with MTV.

In a market where television programming is the media equivalent of fighting with the phone company, moves like this one will keep Baidu in the lead.

(Contributed by Market Watch)