China's Internet Industry

http://www.knowledgeatwharton.com.cn/index.cfm?fa=article&articleid=2407&languageid=1

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"The future belongs to those who see possibilities before they become obvious." (John Sculley)

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When the latest issue of Knowledge @ Wharton came out last night, it included an article from China K@W: "Robin Li of Baidu on Navigating Innovation, Social Networking ... and Google in China." Li is the founder and CEO of Baidu, the country's largest search engine. Baidu has been on the Nasdaq since 2005 and owns 80% of China's search market.

When asked about opportunities for growth, Li pointed out that China is already the largest Internet nation in the world, with 450 million Internet users, but the penetration rate (internet users vs. total population) is only something like 35%.

The issue then is what will get that percentage up? Since Li sees Internet usage over the last 10 to 15 years in China as primarily "consumer-oriented or entertainment-centric," his emphasis is going to be on a business model which emphasizes charging enterprises for advertising or promotional activities: a more basic search revenue approach. This is why, although China's Internet penetration rate of 35% is higher than the world average, the paid search market in China is a lot lower than the world average: 3% of GDP, while the world average is roughly 6%.

What about the Google factor? Google set up an operation in China in 2005, one month before Baidu's IPO on Nasdaq. Over 5 years, Google went from a 30% market share to 20% and backed out of mainland China to its google.com.hk site. But, it's still #2 in China.

About 25% of Baidu's traffic is social search which includes products like "Baidu Knows," which is a question-and-answer service. Li sees this type of product as consistent with China's culture and Baidu's "user-centric" approach vs. Google's more technical approach.

Li sees "box computing" as the future of Internet search, at least in China. Box computing is an open data platform that eliminates all the links that users normally see when they type in something. So, for example, when a searcher types in "weather," Baidu tells you what the weather report is for your city. Baidu will be applying this approach to mobile devices as that market grows in China.

Li's interview was an interesting perspective on the search market in China. His perspective that the current Internet user market in China will double over the next 10 years puts that market's size at almost one billion.