Shares of Chinese search engine, Baidu, which has a market share of about two-thirds of the internet users on the mainland, have risen from $170 a year ago to $609 today. The firm has a market value of $21 billion, which is about the same as Yahoo! (YHOO). The stock has had all of this success despite the fact that there is only limited evidence that the search engine sector is a big business in China.

Google (GOOG), which has about 30% of the Chinese search market, had sales of $300 million from the region last year. Baidu’s total revenue for 2009 was $631 million and it net income was a very modest $217 million. Search was only a $1 billion business in China last year.

About 320 million Chinese use the internet according to the nation’s Internet Development Office. That number is a quarter of the population. Over 600 million Chinese have cell phones. Many of those run on slow connections, so they are not useful for internet access. But, internet use may be under-counted in China because it is impossible to know the number of handsets that are used for gaining access to the web.

The odd fact about search engine statistics in the People’s Republic is that the number of people on the internet is greater than it is in the US, but search revenue in China is a tiny fraction of what it is in America.
There are several possible explanations for the disparity, but no single one of them is convincing because none of them can be proved at this point. Search engine revenue is based on the ability of the search company to sell advertising links next to related search results. That business has not been terribly successful in China, based on the revenue figures from Google and Baidu. It may be that Chinese advertisers have not been convinced of the value of the internet as a strong marketing tool and that the adoption of search marketing will develop over time. But, this is not likely. Search is the single most effective method of reaching customers in almost every developed country. China should not be an exception to that, at least not enough of an exception to hinder the growth of revenue at the search companies that do business inside its borders.

The other and more probable explanation of the failure of the search revenue model in China is that people who search the internet in the world’s most populous nation ignore the ads almost entirely, either out of lack of interest or concern for privacy. This would seem incongruous based on the behavior of Americans online. But, it is only incongruous to the extent that American analysts believe that Chinese behavior mimics that of people in the US. That is clearly not the case in terms of diet, mortality rates, hours spent watching TV, or body mass. There is no evidence to suggest that the Chinese use the internet the way that Westerners do. McKinsey recently reported that people in the largest cities in China spend 70% of their leisure time on the internet, but no one is certain how much of that internet access is done through handsets. Search and the ability to put ads next to search results on handsets are still in their infancies. China’s internet citizens may use a medium to go online but that is not conducive to successful search marketing results.

The Chinese have another reason to be wary of revealing too much of their behavior online, particularly their habits. Internet search activity is an excellent way to judge the interest of people. The Chinese government does enough monitoring of the internet that people online are probably more careful than internet users in most countries in terms of where they go, what they say, and which marketing messages interest them. The Chinese may be willing to search, but may not be willing to use the ads that run next to the search results. That would seem paranoid almost anywhere but in China.

If the Chinese do not click on the ads next to search engine results, marketers will not use search engines to get customers. The entire search economy as it operates in the US and other developed nations may not apply to China at all.

One of the most common mistakes made by capitalists is that if one person will buy something, so will another. If one boy of 15 will buy a bicycle, then all boys of 15 will buy bicycles. It would be ideal for marketers if human behavior was consistent, but it is not, and the use of search engines in China may be completely different from what it is in the US now and forever.

Douglas A. McIntyre

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