TELECOM Digest OnLine - Sorted: The Rise of Baidu (That's Chinese for Google)

The Rise of Baidu (That's Chinese for Google)

David Barboza (
Tue, 19 Sep 2006 13:26:42 -0500

The Rise of Baidu (That's Chinese for Google)

IN the summer of 1998 at a picnic in Silicon Valley, Eric Xu, a
34-year-old biochemist, introduced his shy, reserved friend Robin Li
to John Wu, then the head of Yahoo's search engine team.

Mr. Li, 30 at the time, was a frustrated staff engineer at Infoseek, an
Internet search engine partly owned by Disney, a company whose fading
commitment to Infoseek did not mesh with Mr. Li's ongoing passion for
search. Like Disney, Mr. Wu and Yahoo were also losing interest in the
business prospects of search, and Yahoo 'in a colossal corporate
blunder' eventually outsourced all of its search functions to a little
startup named Google.

Mr. Xu, who had called together some friends for a documentary he was
making on Silicon Valley, thought the two search guys would hit it
off. Mr. Wu says he exchanged greetings with Robin Li, but what most
impressed him was that despite all of the pessimism surrounding
search, Mr. Li remained undaunted.

"The people at Yahoo didn't think search was all that important, and so
neither did I," says Mr. Wu, who is now the chief technology officer at
the Chinese Internet company "But Robin, he seemed very
determined to stick with it. And you have to admire what he accomplished."

Indeed. A year after the picnic, in 1999, Mr. Li founded his own search
company in China, naming it Baidu (pronounced 'by-DOO'). Today, Baidu
has a market value of $3 billion and operates the fourth-most trafficked
Web site in the world. And Baidu is doing what no other Internet company
has been able to do: clobbering Google and Yahoo in its home market.

While Baidu continues to gain market share in China 'and does so with a
Web site that the Chinese government heavily censors and that gives
priority to advertising rather than relevant search results' some
analysts question whether Baidu can withstand competition from Google
and Yahoo, which possess superior technology and global work forces.

But Baidu's evolution, and Mr. Li's journey as an entrepreneur, offer
textbook examples of the payoffs and perils of doing business in China
and suggest that Baidu may prove to be far more resilient than some
analysts believe. China has a population of 1.3 billion, about 130
million of whom are Internet users, an online market second in size only
to the American market. Because China is the world's fastest-growing
major economy, analysts consider it the next great Internet
battleground, with Baidu uniquely positioned to prosper from that

In exchange for letting censors oversee its Web site, Baidu has sealed
its dominance with support from the Chinese government, which
regularly blocks Google here and imposes strict rules and censorship
on other foreign Internet companies.

In addition, analysts say, entrepreneurs in China have a knack for
pummeling American Internet giants. "The globally dominant U.S. Internet
companies have failed to take the No. 1 market share position in any
category," says Jason D. Brueschke, a Citigroup analyst, of the Chinese
market. "And they came with more money and major brand names. And so
there's something fundamentally different about this market."

So fundamentally different, Mr. Brueschke believes, that Baidu will
retain its hammerlock on the Chinese search industry. "The real battle
in the competitive landscape is not about who's No. 1, it's about who's
going to be No. 2," he says.

Google, of course, will have none of this, stressing the independence of
its search results and the international reach it offers users. "People
want information and they want global information," says Kaifu Lee, the
president of Google in China. "We can't be bought."

But Mr. Li says Baidu's model is working supremely well and that the
company has built a loyal base of users who value its search
capabilities. "At the end of the day, if a user finds relevant
information, they'll come back," he says.

ON its corporate Web site, Baidu says that it takes its name from a Song
Dynasty poem written several centuries ago that "compares the search for
a retreating beauty amid chaotic glamour with the search for one's dream
while confronted by life's many obstacles."

Mr. Li, born Li Yanhong in 1968 in what was then an impoverished city
200 miles southwest of Beijing, is familiar with life's obstacles. The
fourth of five children, he grew up during China's brutal Cultural
Revolution. Despite the oppression that surrounded him, he said he was
always able to focus on stamp collecting, performing traditional opera
and other interests, including, eventually, computers. He was bright
enough to get into the country's most prestigious school, Beijing
University, where he majored in library science and dabbled in computer

The government infamously cracked down on pro-democracy demonstrations
in Tiananmen Square in 1989 when Mr. Li was a sophomore, causing his
college campus to be shut down. Mr. Li is mum on the events that
followed, saying only that he was apolitical. But he does say that a
year later he started thinking of studying abroad and that by the time
he graduated in 1991 he was ready to leave his homeland.

"China was a depressing place," he says. "I thought there was no hope."

He applied to the top three graduate programs in computer science in
America, but did not get into any of them (perhaps, he says, because
China was considered an also-ran in technology). "I blindly sent out 20
applications," he says. "SUNY Buffalo was the only program willing to
give me a fellowship."

He enrolled at Buffalo planning to earn a Ph.D. in computer science but
grew disillusioned with academia. He completed his master's degree in
1994 and then joined a New Jersey division of Dow Jones & Company, where
he helped develop a software program for The Wall Street Journal's
online edition. During that time, he also became enamored of the
technology boom taking shape in Silicon Valley. He spent much of his
time trying to solve one of the Internet industry’s earliest problems:
sorting information.

A breakthrough came in 1996, he says, when he developed a search
mechanism he called 'link analysis', which involved ranking the
popularity of a Web site based on how many other Web sites had linked to it.

"The moment I created this thing I was very excited," he says. "I told
my boss and pushed him. But he wasn't very excited." Soon after, he
attended a computer conference in Silicon Valley and set up his own
booth to demonstrate his search findings.

William I. Chang, then the chief technology officer at Infoseek, met
Mr. Li at the conference and recruited him to oversee search engine

"Robin is possibly the single most brilliant and focused person I know,"
Mr. Chang says. "And his inventions, now widely adopted, are still the
gold standards in Web search relevance."

After Disney acquired the small fraction of Infoseek stock it did not
already own in 1999, it shifted the company's focus away from search and
toward content, leading Mr. Li to form his own Internet company with
Eric Xu, who had a Ph.D. in biochemistry and good contacts in Silicon

The partners raised $1.2 million from two Silicon Valley venture
capital firms, Integrity Partners and Peninsula Capital, and with
their seed money in hand flew to China and founded Baidu in a hotel
room overlooking Beijing University's campus. Nine months later, in
September 2000, two other venture capital firms, Draper Fisher
Jurvetson and IDG Technology Venture, pumped another $10 million into
the startup.

So it was that on the eve of the Internet bubble bursting in the
United States, Baidu took off in China.

"When I came back I was prepared for a rough life," Mr. Li says. "It
turns out it wasn't so bad."

Baidu started out offering search services to other Chinese portals
before developing its own stand-alone search engine. Some members of
Baidu's board of directors opposed the shift, saying it would turn
customers into competitors. But Mr. Li said he sensed a shift in the
market after watching the success of Overture, a company in Pasadena,
Calif., that sold advertising space correlated with search results
(which meant, for example, that ads for dental clinics might pop up
next to search results for cavities).

"We were skeptical about search," says Scott Walchek, a partner at
Integrity Partners and a member of Baidu's board. "But we weren't as
smart as Robin. Robin said he had a unique opportunity to build a brand
around search. And he was right."

In September 2001, Baidu began its own site which looked
almost exactly like Google's no-frills home page. And even before Google
did it, Baidu allowed advertisers to bid for ad space and then pay Baidu
every time a customer clicked on an ad. Small and medium-size companies
loved it, the site became deluged with traffic and Baidu turned a profit
in 2004. By then, Mr. Li was pushing for an initial public offering in
the United States, insisting it would be a huge branding event for a
company that had come to be called "China's Google."

BAIDU went public on Aug. 5, 2005, at $27 a share. When trading ended
that day, shares of Baidu closed at $122, up 354 percent, the biggest
opening on Nasdaq since the dot-com peak in 2000. Suddenly, Baidu was a
$4 billion company and Mr. Li held stock worth more than $900 million.
But not everyone cheered. Many analysts said that by almost every
measure Baidu’s stock was ridiculously over-valued. It eventually
tumbled to as low as $44 before rebounding. On Friday, its shares closed
up $3.03 in regular trading, to $87.75, giving the company a market
capitalization of about $2.94 billion.

At the time of the I.P.O., some critics attacked Baidu's zealousness for
ad revenues. They noted, for example, that a Baidu search for the word
'cancer' turned up ads for hospitals that paid for top spots in results
rather than returning information on cancer itself. In comparison,
Google and Yahoo more clearly separate ads from relevant search results
by placing them on the right side of the page.

The company's revenue jumped 190 percent in the first half of this year,
to $40.9 million; profit soared 550 percent, to $11.7 million. Baidu's
Web site is drawing millions of young people eager to download music
files, create blogs or search for pictures of China's '10 Most Beautiful
Women.' While Baidu is growing fast, its revenue is still anemic
compared with Google's, which is expected to top $7 billion this year.

Analysts say Baidu is playing to a different audience than Western
Internet companies because the Chinese are far more interested in
entertainment than news, books or car rental rates. "The fact is 70
percent of China's Internet users are under the age of 30," says
Richard Ji, an analyst with Morgan Stanley. "Most of them are
single, only children. They're looking for entertainment."

That may explain why China's dominant Internet companies are all
entertainment focused, like Tencent (which hosts online communities
and instant messaging) and Netease and Shanda (which are online gaming

Yet no Internet company in China is growing as fast as Baidu, which
had more than 50 percent of the pay-per-click market in the first half
of year, up from a 37 percent share in the same period a year ago,
and according to Analysys, a research firm in Beijing. Google and Yahoo
both lost ground, with each company holding 16 percent pay-per-click
shares for the first six months of 2006.

Still, Baidu faces significant challenges. The company’s stock is
in the stratosphere, putting pressure on management to deliver
knockout growth every quarter. Google’s shares closed up $5.90
Friday in regular trading, to $409.88, meaning investors pay a hefty
$60 for every $1 of profit in the stock, far more than other Internet
companies. But Baidu investors pay a whopping $190 for every $1 of

Baidu also faces legal challenges, including lawsuits claiming it
violates copyright laws on music files. Baidu has been sued over the
issue, but continues to provide links to sites that offer music files.
The company says it does not believe it should be held responsible for
simply offering linking to other sites. In a country rampant with
claims of click fraud, a Beijing hospital recently claimed that Baidu
orchestrated a scheme in which a Baidu affiliate kept clicking on the
hospital's ads to fatten the fees it had to pay Baidu. A Baidu
spokeswoman says the company has not reviewed the case, but actively
polices click fraud.

LOOMING on the horizon are Google and Yahoo. Google says it plans to
spend hundreds of millions of dollars to compete in China, and Yahoo
has merged its operations here with Chinese Internet behemoth

"Google is fierce," Morgan Stanley's Mr. Ji says. "And Alibaba has the
best sales force. Baidu could get hurt on the technical side."

But the Chinese market is littered with the wreckage of American
Internet companies that have failed to dominate here. In 2003, eBay
bought the largest Chinese auction company and then lost market share.
In 2004, Amazon bought the largest Chinese online merchandiser and
then lost market share.

Now, the real fight begins. Google, which invested $5 million in Baidu
just before its public offering last year, sold that stake for a hefty
$60 million in June. And now, Google is building up a huge research
team in Beijing, not far from Baidu's headquarters. But analysts say
it won't be easy for Google.

"The American Internet giants are dominant in the U.S. and dominant in
Europe," Mr. Brueschke at Citigroup says. "And then they come to China
and fail. And so what I want to know is: What is Google going to do

For his part, Robin Li seems undaunted.

"Our traffic keeps increasing," he says confidently. "We're now the No.
1 Web site in China."

Copyright 2006 The New York Times Company

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