Searching Questions: Internet Searches in China

Even before jan. 12, 2010, life was pretty good for Robin Li. The soft-spoken 41-year-old is the co-founder and chief executive of Baidu.com, the dominant search engine in China, the country with the most Internet users in the world. His stake in the company — started in 1999, five years after getting his M.S. from SUNY Buffalo in 1994 — is worth about $2.8 billion now. That makes him the seventh richest man in China, according to the annual rankings in Forbes magazine. Though he's been a computer geek since his undergraduate days at Peking University, his boyish good looks hardly fit the profile, and as a result he's attained rock-star status in China, particularly among female Netizens (even if he is happily married and the father of three young daughters).

But then came Jan. 12, and for Li and Baidu, things went from the sublime to the ridiculous. That's the day Google drew its now famous line in the sand, saying it was no longer willing to censor its Internet searches in China — as the authoritarian government demands — given what it believes have been repeated attempts by Chinese authorities to hack its systems and steal dissidents' Gmail addresses. However noble Google's sentiment may be, in business terms it was "effectively a suicide note" when it came to the search business, as one rival Internet executive put it. "Google is done in China, at least for now." If you Google Baidu, nearly every press story that pops up will mention its fierce rivalry with the Mountain View, Calif., company. Baidu executives now don't quite know what to make of the prospect of life without it. "Things have gotten very strange very quickly," says one. (See 25 sites we can't live without.)

Not that Baidu's shareholders are likely to complain. The company already collects 64% of the revenue generated by search engines in China via advertising, according to Analysys International, a market-research firm, and claims 76% of overall search traffic. The comparable figures for Google are 31% and 20%. If Google soon shuts down its Chinese search engine (Google.cn) — as most analysts believe it will — Baidu will grab even more. Dick Wei, senior analyst at JPMorgan Securities in Hong Kong, estimates that if Google loses a quarter of its China traffic, Baidu will reap a 6% gain in revenue; the gain would be 12% if the number of eyeballs logging onto Google shrinks 50%. For the last full year completed, 2008, Baidu generated $468.8 million in revenue and earned $153.6 million. Though they haven't yet reported full-year 2009 results, Baidu's stock soared from just shy of $390 per share immediately prior to Google's dramatic announcement to more than $465 per share, before retreating slightly on Jan. 19. Google at the same time fell from $595 per share just before the announcement to $540 Jan. 25.

It's easy to see the Baidu story as so many in China now do: Chinese upstart whips the American Goliath. But it's more complicated than that, as Li is the first to admit. The fact is, Baidu's success resembles a typically American success story. Li was born in an impoverished town about 200 miles (320 km) from Beijing, and as a young man was smart enough to get into Beida, as the Chinese call Peking University. Like so many students of that era — just after the government's assault on demonstrators in Tiananmen Square — he wanted to go to graduate school in the U.S. "Back then," he has said, "China was a depressing place." Li applied to 20 universities with computer-science programs. Only one, the State University of New York at Buffalo, offered him a scholarship. "So I packed up my winter coat," he joked in an interview with Time last spring, "and went." (See pictures of life in the Googleplex.)

After getting his master's degree in computer science, Li became a consultant for IDD in 1994, then a financial-database company that was a subsidiary of Dow Jones. Even then, Li says, he was "intrigued with search," long before it became the hugely powerful, money-spinning machine that it is today. At IDD he developed an algorithm that ranked the popularity of various websites. He then got recruited by Infoseek, a company that had developed one of the first search engines in the mid-'90s — only to see Walt Disney acquire the company and shift its focus. (Yes, the Mouse House could have been Google before Google.) So in 1999, he and a friend did what Silicon Valley entrepreneurs do: they raised $1.2 million in venture capital, added another $10 million to that the next year, and started up Baidu back home in Beijing. (Read "Google and China: Silicon Valley Is No Longer King.")

The company turned its first profit in 2004, and went public on the Nasdaq the following year, raising more than $100 million in the process. It was by far the most successful Internet IPO since the dotcom bubble burst in 2000. One of its earliest investors, in fact, was Google — before the company entered the China market in 2006. It paid $5 million for a 2.6% stake in Baidu in 2004. But Google sold its stake in Baidu for about $60 million two years later, and entered the search business in China on its own. It was game on.

Baidu got traction in its home market by focusing its search engine on China-centric information. "Initially, we were better [than Google] on stuff a Chinese Internet user would search for," says one insider. "They've since closed that gap somewhat, but that emphasis early helped us get and maintain our lead.'' Baidu has also introduced a question-and-answer service called "Baidu Knows," which is a hit. And the company just won a big legal battle when a popular music-download function it offers was cleared of copyright infringement by a Beijing court. The complaint had been brought against Baidu by major Western music labels.

Critics say that Baidu has won favor with the government through its rigorous self-censorship. (Punch in "Tiananmen Square 1989" and you'll mostly get results about security arrangements for the 2008 Olympics and last year's celebrations for the 60th anniversary of the founding of the People's Republic, with only a few sanitized references to the student demonstrations.) Authorities have certainly scrutinized and disrupted Google's China operations far more frequently than Baidu's (one former Google employee calls it "operational harassment"). But it's not at all clear that it made much of a difference to the bottom line. (Read "Google Ends Policy of Self-Censorship in China.")

There have been times, in fact, when the Chinese government, in the form of its state-owned media, has turned on Baidu. In 2008, CCTV, the powerful state-run television network, aired reports on the site's habit of serving up unlicensed doctors and illegal pharmacies in response to medical queries on its engine. It turned out those were Baidu advertisers. The disclosures hit directly at the site's integrity and temporarily crushed the stock. Baidu has only just finished rolling out a new program that will delineate paid results from general searches, but that remedy has taken more time than some analysts expected. And recently two senior executives — the chief operating officer and the chief technology executive — resigned for "personal reasons." (A Baidu spokesperson says those reasons had nothing to do with performance and that the two executives left to pursue other opportunities.)

Baidu's flaws would mean more if Google were sticking around. If it's not, Baidu will have the world's most populous country almost to itself. And that won't be a good thing for anybody. "The lack of a strong second player may unmotivate Baidu to improve" is how JPMorgan's Wei puts it. The company has gone from a Silicon Valley start-up, in a field that didn't then exist in China, to a nimble competitor that was challenged by the global king — and won. The risk that one day it could turn into a hoary monopoly simply because it lacks a serious competitor in its home market was a preposterous notion when the new year began. It's not now.

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