Temat: It's Baidu's fight to lose in world of China search

It's Baidu's fight to lose in world of China search

By ANDREW PEAPLE

With earnings up strongly year to year and its main competitor in China in limbo, life seems pretty good for Internet company Baidu.

If only things were that simple in China's competitive Internet market, where being out in front today only means that Baidu has more to lose than most.

Google, Baidu's closest rival in the Chinese search-engine market, may not have much more of a future in China. That could well leave Baidu, already with a roughly 60% market share, even more comfortably ahead of the rest of the competition. It is certainly turning its leading position to advantage now. Last year's earnings were a 42% improvement over 2008, it said Wednesday, while its fourth-quarter performance beat expectations.

But Baidu also has had some setbacks of its own. One market in which it is struggling is e-commerce. Youa, its consumer-to-consumer site, has gained little traction in an area now dominated by Taobao, a part of the Alibaba empire, which has cornered more than 80% of the market.

This could prove more of an Achilles heel for Baidu in the years to come. Credit Suisse expects China's e-commerce market to expand rapidly, with a compound annual growth rate of 54% out to 2012 from 2009. As the market grows, there is the potential for companies to spend more of their advertising budgets on sites like Taobao, which get traffic from consumers flashing their cash, compared to more general search engines such as Baidu.

Having failed with Youa, Baidu has turned to Japanese company Rakuten for help. The two companies will together invest $50 million over the next three years on a site putting consumers in direct touch with businesses.

It is important for Baidu that this venture succeeds. Currently, Taobao blocks searches generated from Baidu, leaving the latter with little choice but to build up its own e-commerce business. Yet for all the joint venture's importance to Baidu, Rakuten—with a 51% share—will seemingly hold the whip hand over its operation.

None of this is to suggest disaster looms for Baidu. Its strong brand recognition in China and high market share mean its near-term future is bright. For sure, search-engine rivals like Sina, Sohu and Tencent will rise up, but they will take some time to eat into Baidu's market share.

Baidu is in the clear for now, but this is no time for it to bask in its success.

—Andrew Peaple

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