In China’s rapidly evolving online search industry, portals are jockeying for greater market share and diversifying revenue streams as new channels – such as mobile web services – open up for exploitation.
Baidu.com (BIDU.NASDAQ) has successfully maintained its leading position in the country’s search segment, servicing more than 60% of online searches to Google’s share of around 20%. Its leadership is likely to continue with the launch in December of a new search advertising platform, Phoenix Nest, which replaced a controversial paid search ranking system.
Liu Ning, an analyst at Beijing-based technology consultancy BDA, told CHINA ECONOMIC REVIEW that Baidu’s focus on improving its advertising platform is a smart move. He expects the value of China’s online search ad market to hit US$3.3 billion in 2013, up from US$717.6 million in 2008.
Prospective advertisers are attracted by the rising number of internet and search engine users. Small and medium-sized enterprises in particular are discovering the advantages of marketing with search tools, which are able to track user behavior. Liu puts Baidu’s current online advertising and search hit client base at around 200,000 – a fraction of its potential.
In a recent report, Citi analyst Catherine Leung, who has a "buy" call on Baidu, said Phoenix Nest should boost the firm’s ability to capture advertisers’ budgets in the longer term by increased coverage, increased click-through rates (the percentage of users clicking on a link out of the total number of users who view the link), and increased cost per click (the amount an advertiser pays for a single click on the ad to bring the user to its website).
The roll-out of Phoenix Nest was in many ways a timely move. Google China has run into trouble, with regulators blocking its site intermittently and the departure of its CEO. Given the convenient similarity between Phoenix Nest’s closed bidding system (where advertisers bid to have their ads appears based on certain search terms) and Google’s, Baidu may be able to gain further market share on the strength of its brand name.
Perhaps it was with this in mind that Google China recently decided to alter its business strategy by reducing investment in wholly localized products. Local media reports indicate that the firm has been hemorrhaging technicians from product areas including maps and mobile search.
The search war is also being waged on a new front. In October 2009, Baidu said it would provide wireless searches to China Unicom’s 3G mobile subscribers. The deal will see Baidu services pre-installed on all Unicom 3G handsets, following a similar deal with China Telecom.
This means Baidu can tap into a growing and aggressively contested area, in which Google is a strong competitor. Figures from research firm Analysys International show that China’s third quarter mobile search volume increased 8.8% quarter-on-quarter, reaching 296 million requests. Baidu and Google secured market shares of about 25% each.
However, even with large market shares, the search giants’ dependence on online advertising revenue and paid search hits could put limits on revenue growth compared with other online services. Online games have shown greater resistance to the economic maelstrom; Analysys figures show that third-quarter online gaming revenue tilled in at US$1 billion against online ad operators’ US$609 million.
Jin Yoon, an internet analyst at Nomura Securities in Hong Kong, said he prefers online gaming plays such as Tencent Holdings (0700.HK) and B2B platforms to search firms.
Other major internet companies have already looked to fresher pastures to secure income growth. Leading web portal Sina.com (SINA.NASDAQ) signed a deal in July with E-House (EJ.NYSE) to combine real estate services to form China Real Estate Information Corp; the new company secured US$231 million in an October listing in New York.
But BDA’s Liu is still confident about the potential for search revenues. "As China’s economy continues to boom, advertisers are willing to increase their spending on online advertising, including search engines," he said.