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Cold wars and search wars

James Christopher Chris Westland | Jan. 29, 2009
Making sense of Chinas Internet

Search engines and other Internet businesses often compete on scale. Their entry into a market is an all-(read: the entire population)-or-nothing affair. This is a result of what economists call network effects. The value of Internet businesses tend to increase proportional to the square of the number of users, but only after they have reached a critical size.

Google China is emblematic of the idiosyncrasies of Chinas Internet business. Founded in 2005 by former Microsoft executive Kai-fu Lee to bring Googles Chinese search in line with Chinas Golden Shield Project (a.k.a. the Great Firewall), it was approaching a 25 per cent share of search by 2008 (Sources: Sherman So & J. Christopher Westland (2009) Red Wired: China's Internet Revolution, Cyan: London, forthcoming in the Summer of 2009). Unfortunately, this was only a distant second to local company Baidu with more than 65 per cent market share. Many of our friends told us you guys need to get out of China recalls Jun Liu, head of research at Google China.

Google China has stuck it out, with new Chinese language offerings such as Google Music Search, and special versions for Google Map for the Chinese Spring Festival travel season. But Baidu still leads in brand recognition, even if consumers do feel that Google provides better results. But the strain has taken a toll on Google with a number of its key players defecting to local companiesJames Mi, director of corporate development, Alan Guo, chief strategy initiator, and Tina Tao, Kai-Fu Lees personal assistant. I always encourage people to leave Google China to start up new companies, Lee counters, and Ill feel proud if their business plan turns out to be great.

Yahoo is another American Internet icon (founded by Taipei-born Jerry Yang). Yahoos recent performance has been even less encouraging. Its search market share in China plunged from 21 per cent in 2005 to 5 per cent at the end of 2006. This 16 per cent of market share lost by Yahoo might have been swept up by Google China were it not for a Microsofts lawsuit against Kai-fu Lee over his departure which limited Google Chinas growth until 2007. 

Both Google and Yahoo were foundering in China at the end of 2005. Yahoo indirectly decided to relinquish the business to someone with a better understanding of the Chinese markets. Just one month after Lee handed his resignation letter to Microsoft in 2005, Jack Ma, founder of Alibaba was offered Yahoos China business. Ma, a former college English teacher, built Alibaba into a business supply powerhouse. Ma subsequently entered the online auction business, stealing market share from eBays, and reducing them from a commanding lead of 80 per cent of the China consumer auction market to less than 10 per cent.  


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