Challenges ahead for China search leader

China's leading internet search provider, Baidu, has a bright future ahead of it, although there are serious challenges to be overcome, according to market observers.

“We believe the company is well positioned for expected positive trends, including the greater adoption of paid search for small and medium-sized enterprises and brand advertisers, the growth of e-commerce, and the emergence of user-generated content,” commented analysts from WR Hambrecht and Co in a recent report on the company. “In addition, Baidu's local know-how and attentive customer service creates barriers for its competitors.”

WR Hambrecht forecasts revenue of $211m for Baidu next year, more than double this year's estimate of $106.4m.

Baidu has so far successfully fought off a challenge from international rivals Google and Yahoo for search market share. Google has actually seen its share of China's growing search market shrink slightly this year, to around one quarter, according to the China Internet Network Information Center (CNNIC). Meanwhile, Baidu has grown to attract almost two thirds of China's search traffic. Other researchers believe the two firms have a lower share of the overall market, but confirm that Baidu is well ahead of its competitors.

While Google is recognised as a global leader in search engine technology, Baidu has focused all its efforts on the Chinese market, says Chang Yanjie, a senior analyst with Beijing-based CCID Consulting Co.

Although Baidu generates much of its revenue by selling sponsored search results which are almost indistinguishable from standard unpaid results, this has not so far caused much concern among users, WR Hambrecht's analysts believe.

The sponsored search results appear above unpaid results. For some search terms, the entire first page is filled with paid links.

Despite this, a recent CNNIC survey showed that two thirds of web users were not at all concerned about the inclusion of sponsored search results, as long as they were relevant to the search query. In fact, only five per cent of users are able to tell the difference between paid and unpaid search results, CNNIC found.

Baidu has also faced numerous complaints about click fraud according to Chinese press reports over the past six months. In these cases, advertisers typically claim that a rise in clicks on their adverts has not been reflected by an increase in business. The implication is that, like other pay-per-click advertising schemes, Baidu's system is vulnerable to bogus clicks from people who have no interest in the advertised product or service. These are variously blamed on competitors, or on advertising agents who are attempting to boost their commissions.

During a recent conference call with analysts, Baidu CFO Shawn Wang pointed out that, despite protests and threats to sue Baidu, no click fraud cases had actually been filed with courts in China. He said the current situation was therefore a 'public relations' issue, rather than a legal issue.