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Tuesday, August 30, 2005                                             Section: Technology / Page: 2

China search market does not have to evolve the US way

Michael Logan, Technology Editor

Google "Google", "Altavista" and "history" in the same search and you will find thousands of references recounting how Altavista was once the top search engine until the company founded by Larry Page and Sergey Brin came onto the scene.

The lesson for any competitor in the quickly changing internet industry is this: market leadership can be short-lived and incumbency easily overthrown.

Yet this appears to have been forgotten by the investors of Baidu.com, presently the largest player in China's nascent search engine market and worth US$2.5 billion on the Nasdaq market.

The company reported a 381.8 per cent rise in quarterly earnings to US$1.5 million last week, but even this growth makes the enormous market capitalisation difficult to justify.

Investors are betting that Baidu is the Google of China or, even better, that Google will eventually buy Baidu outright. But neither company is the presumptive winner in the mainland search market, and long-term success is far from assured.

What makes a good search engine company? One factor is having great search technology, the ability to provide the information users want.

When it comes to this task, Baidu and Google excel, with a 37 per cent and 23 per cent share of user queries respectively, according to Analysis International.

But there is a host of upcoming companies that claim to be developing better technologies, designed specifically for the challenges of Chinese-language search.

Beijing-based start-up YDCTech hopes to replace "keyword" searches with "semantic-based" tools that were originally designed to understand the structure of DNA.

The company's software examines the Chinese language in a "bottom-up" manner, treating ideographic characters as the basic units of the Chinese language, and from there attempting to understand vocabulary and syntax.

It is difficult to say whether this approach will lead to better search results, as YDCTech claims, but the company has been scouting for investment and reportedly in talks with several investors.

Another start-up is Cgogo.com, which offers mobile search to China Unicom and China Mobile. Cgogo claims its technology uses "fuzzy search and concept clusters rank algorithms", grouping results in "concepts."

Yet another company is Zhongsou Online Software. Last week, its Hong Kong-listed parent HC International announced the sale of 42.5 per cent stake worth US$4.74 million to venture capital investors, a move that could eventually lead to Nasdaq flotation.

Any of these companies, or some other unknown company, could easily develop a search technology to make Baidu and Google the Altavista of China.

The second thing needed is a great sales organization to win advertising from China's small and medium-sized enterprises (SMEs), and this is something Google lacks.

It may also be why Google has taken a 2.6 per cent stake in Baidu - which had US$13.4 million in sales last year, in a market worth US$113.5 million - and why many think Google will eventually try to acquire its mainland counterpart. This speculation was renewed after Google announced it would raise as much as US$4 billion in secondary stock offering.

Yet in terms of sales to SMEs, the present market winner is not a search company at all. That title belongs to business-to-business portal Alibaba.com, which has a US$68 million in annual turnover.

This suggests the mainland search market might not develop in the same way as it has in the United States.

As Chinese companies look for business at home and abroad, they might find the services of a dedicated e-commerce portal such as Alibaba more valuable than search engines, which attract visitors looking for "free" MP3 files just as much as they do business users.

Alibaba presently enjoys better relationships with SMEs, and any contender in the search market will have to compete with it for marketing dollars.

Google know that popularity in China does not guarantee financial success. In its stock prospectus, it says: "Even in countries where we have a significant user following, we may not be as successful in generating advertising revenue due to slower market development."

As for Baidu, the search company could wind up looking more like iTunes than Google, thanks to China's unique characteristics.

About 22 per cent of its search traffic is related to MP3s, many posted to the internet in violation of their owners' copy rights.

To monetise this traffic and keep in good with the record labels, Baidu is reportedly planning to launch a paid MP3 service, through which users can download legitimate song files.

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