How Google Could Have Bought Baidu And Other Fascinating Details About China’s Largest Search Engine

BusinessWeek has published a terrific and lengthy article on Chinese search engine Baidu, how it “won” China and its global aspirations. The following is the CliffsNotes version.

Baidu holds a 73 percent market share in China, the world’s largest internet market. The company is worth $38 billion and is 57 percent larger than Yahoo. Its shares have doubled in value since Google “withdrew” from China to Hong Kong earlier this year.

Baidu CEO Robin Li (41) got a masters at SUNY Buffalo. He once worked at Infoseek and is now the second richest man in China.

The piece contains a number of allegations, which Baidu denies, about unethical practices:

For years legions of advertisers have complained on Chinese Web forums that Baidu secretly penalizes the search rankings of websites that decrease their spending on Baidu . . . In 2008 the company quickly denied Internet chatter claiming it had taken money from Sanlu Group, a dairy producer that had sold milk powder tainted with the toxic chemical melamine, to keep the scandal out of search . . .

Baidu says it is not a kingdom built on Internet piracy, though music companies say its popular MP3 service allows users to download just about any song ever recorded for free. The recording industry sued in 2005, but Chinese district and appeals courts sided with Baidu . . .

Censorship is also willingly practiced by the company:

Like all Chinese Web companies, and Google’s Chinese language site until this year, at the behest of the Chinese government Baidu blocks pornography or references to topics such as Taiwanese independence, the Dalai Lama, and the 1989 Tiananmen Square massacre. The practice is called zi lu, or “self-discipline,” and Baidu does it well. Last year the company accepted one of 20 awards from the Internet Society of China, given for what the group calls “industry self-regulation.”

Baidu was the direct beneficiary of Google’s ouster from the mainland. It’s unlikely that Baidu had anything to do with the GMail hacking incident that caused Google to declare it would no longer cooperate on censorship. But there have been persuasive allegations that the Chinese government or its surrogates were behind the hack attack. If so perhaps the government was trying to indirectly bring about what has in fact happened: the marginalizing of Google in China and the elevation of a cooperative partner, Baidu, to near monopoly status.

Google saw itself as a force for change and helping open up Chinese society by degrees. The Chinese government obviously doesn’t want any part of that.

The story also touches on another success issue, that the Chinese government may have helped Baidu with making Google unreliable:

Google never materialized as a threat, for reasons that no one can agree on. What’s clear is that Google’s China service was mysteriously unreliable, particularly when the Chinese government was angry with the U.S. Google also documented several instances when it was the victim of what’s called domain name system poisoning; users typed in Google.cn and found themselves at Baidu instead.

A New York Times Magazine article from 2006 details this more:

But even after being unblocked, Google still had troubles. The Great Firewall tends to slow down all traffic coming into the country from the world outside. About 15 percent of the time, Google was simply unavailable in China because of data jams. The firewall also began punishing curious minds: whenever someone inside China searched for a banned term, the firewall would often retaliate by sending back a command that tricked the user’s computer into believing Google itself had gone dead. For several minutes, the user would be unable to load Google’s search page — a digital slap on the wrist, as it were. For Google, these delays and shutdowns were a real problem, because search engines like to boast about delivering results in milliseconds. Baidu, Google’s chief Chinese-language rival, had no such problem, because its servers were located on Chinese soil and thus inside the Great Firewall. Worse, Chinese universities had virtually no access to foreign Web sites, which meant that impressionable college students — in other countries, Google’s most ardent fans — were flocking instead to Baidu.

Still Baidu must constantly “curry favor” with the communist regime. According to the article, government displeasure can result in investigations or critical profiles in state-run media:

In November 2008, government-operated China Central Television aired several in-depth investigations about Baidu surrounding allegations that the company earned millions on ads from unlicensed medical providers, and prominently displaying these ads when users typed health-related queries. The first story ran on Li’s 40th birthday, timing that no one at Baidu dismissed as coincidental. The following quarter, Baidu boosted its ad spending by 41 percent, with the bulk of the increase going to CCTV. Few Chinese Internet watchers thought it was a coincidence when the negative coverage ceased.

Baidu now wants to expand horizontally and globally, “into games, e-commerce, and online payments, establishing a Hulu-like video site called Qiyi, and exporting the Baidu brand abroad.” Li is quoted in the article saying he wants Baidu to be a global internet power:

I hope in ten years, Baidu will become a household name in 50 percent of the world. Sooner or later you will see a China-based company that really has a global impact and I think Baidu has a chance to become one of those companies. We should be able to compete on a global basis.

Generally Li comes off relatively well in the article, as a humble Chinese engineer living in the US who was inspired by Yahoo’s co-Founder Jerry Yang. Li had come up with a “link analysis” system similar to Page Rank. And there are other interesting parallels between Baidu and Google, not all of them coincidental.

Though Baidu is Chinese through and through, Silicon Valley money started the company. And early investors made a huge killing, comparable to what happened with Google, when it went public. Interestingly Baidu initially modeled itself on inktomi, which powered search at Yahoo before Google came along.

Li and Xu were much more interested in being the next Inktomi . . . Baidu licensed its search index to Sina and Sohu.com, then the dominant portals in China, and charged them each time a user conducted a search. Busy copying Yahoo’s portal business model, those companies didn’t realize search’s potential, concedes Charles Zhang, chairman and CEO of Sohu. “

Later the company developed its own site when its relationships with the Chinese portals went sour. It was at this point that the company was almost acquired for $40 million by Yahoo:

Finian Tan, then a Hong Kong-based partner at ePlanet, says he was so worried about the company’s prospects that he contacted Jerry Yang, an ePlanet investor, and offered to sell Baidu to Yahoo for $40 million . . . [Yang] referred the matter to a Yahoo colleague, who did not respond. (Yang declined to comment for this story.) Baidu had no choice but to devote its energies to its own website. “We became Baidu.com because we were forced into it,” Tang says.

That wasn’t the only acquisition attempt. There were several near acquisitions of Baidu before it went public, which sound very similar to the early history of Google.

In 2004, “Google contributed $5 million to Baidu’s $15 million third round of financing . . . [the] investment was meant to lay the groundwork for a possible acquisition and ward off the possibility that rivals could buy it.” Later, SoftBank founder Masayoshi Son “wanted to keep Baidu private and offered to invest $100 million at a $1 billion valuation. Yahoo and Microsoft  made acquisition offers at a little over $1 billion . . . Google … ultimately made a $1.6 billion bid.”

One of the early investors and Baidu board member, Asad Jamal, said that “a $2 billion bid would have cemented an acquisition. ‘I personally think that was a missed opportunity for Google.'”

Missed opportunity? Clearly.