July 25 (Bloomberg) -- For Baidu.com Inc., the Google Inc. imitator with a 58 percent share of the Chinese Web-search market and a $6.18 billion market value to prove it, the battle for dominance is just beginning.

At stake is the Internet market in China, the world's second-biggest after the U.S. by users. Google is gaining ground, if rising short interest on Baidu is any indication.

``They'd better perform, and if they don't the stock will go down,'' said Jim Oberweis, president of Oberweis Asset Management Inc. in Lisle, Illinois, which held 234,000 Baidu American depositary receipts as of March.

Google Chief Executive Officer Eric Schmidt has poured resources into China, luring Baidu employees with perks and forging partnerships with its competitors. That may be reason to sell shares of Beijing-based Baidu, which trade at 136 times earnings -- triple the valuation investors place on Google, the world's most-used search engine.

Short sellers have increased bets against Baidu by 78 percent since mid-April, while the price of the ADRs has risen 88 percent. They rose $8.19, or 4.7 percent, to $183.23 at 4 p.m. New York time in Nasdaq Stock Market trading. Google, based in Mountain View, California, fell $4.24 to $509.76 and has climbed 11 percent this year.

``Baidu's stock price is justified if the gap between it and Google is widening, but in reality that gap is narrowing,'' said Wallace Cheung, a Hong Kong analyst at Credit Suisse Group who rates Baidu shares ``underperform'' and said they are worth $95 each.

Market Share

Google, with $10.6 billion in 2006 sales, almost 100 times the 837 million yuan ($110 million) of Baidu, has used size to its advantage and exploited its outsider status to win users. Google's China sales may surge almost 10-fold to 2.44 billion yuan in 2010 from 250 million yuan last year, compared with Baidu's fivefold gain to 4.24 billion yuan, according to Credit Suisse estimates.

Baidu's share of China's search advertising rose to 58 percent in the second quarter from 57 percent in the first, Analysys International, a Beijing-based researcher, said yesterday. No. 2 Google had a bigger increase, to 23 percent from 19 percent.

The market may more than quadruple to $895 million in 2009 from $193 million last year, Credit Suisse estimates. Baidu reports second-quarter results tonight in the U.S., when it will be July 26 in Beijing.

Taking Advertisers

Google has taken advertisers from Sunnyvale, California- based Yahoo! Inc. and Beijing-based Sohu.com Inc.Sina Corp., based in Shanghai and China's most-visited Web portal, agreed last month to scrap its search engine and use Google's.

Sina and Sohu view Baidu as a direct competitor because as a Chinese company it won a license to produce news, said Wendy Huang, an analyst at Evolution Securities Co. in Shanghai.

Google, which spent $408 million in the first quarter to develop Web services versus Baidu's $3.2 million, also won users with online programs such as maps and spreadsheets. In January, Google introduced wireless search services with China Mobile Ltd., which has more subscribers than the U.S. population. Baidu doesn't have an agreement with a wireless carrier.

China had 162 million Web users at the end of June, the government-backed China Network Information Center said July 18.

Google is luring employees with higher salaries than competitors and perks including free massages and funding for startups founded by employees.

Microsoft Corp. filed suit in 2005 to prevent Lee Kai-fu from leaving to run Google's China operations. Microsoft and Google settled in December 2005.

Lights, Smoke

Lee leads recruiting events for Google that are more rock concert than job interview. At a Beijing event in March, he took the stage amid purple lights and smoke, with the song ``Ain't No Mountain High Enough'' blaring.

Google has added programmers and engineers in China ``very quickly,'' Beijing-based spokeswoman Marsha Wang said, declining to give figures. The company plans to hire ``thousands of people'' for its Beijing development center, Schmidt said last year in the Chinese capital.

For Google, there's more than profit at stake. The company put its ``Don't Be Evil'' motto on the line last year when it agreed to censor content from its China site, including material about the 1989 student protests in Tiananmen Square.

Schmidt, in an interview shown on BT Group Plc's Web site last year, called the choice to open a censored site the hardest Google has made. The decision led to criticism by Amnesty International and by U.S. lawmakers.

Schmidt's Goal

China is so important to Schmidt now that he flew in for his 52nd birthday in April to meet employees and deliver a message: ``We will eventually be the market leader.''

Having dented Baidu's growth, Google may find overtaking its Chinese competitor a tougher challenge. Baidu is unlikely to lose the top spot because it has a closer relationship with the Chinese government, according to Credit Suisse's Cheung.

Google probably won't match a service Baidu offers that helps users locate music files and accounts for about 12 percent of its Web site traffic, Cheung said. EMI Group Plc, Sony BMG Music Entertainment, Warner Music Group Corp. and Universal Music Group lost a legal case in China last November accusing Baidu of copyright violations, because the music was downloaded from a third party.

``Baidu will continue to grow and add more users,'' said Lynn Lin, a spokeswoman for Baidu in Beijing. She declined to comment on the company's stock price.

Domestic Companies

Precedent also works against Google. Domestic companies lead every Web market in China. Yahoo and EBay Inc. have partnerships with locally based companies for their China operations. Amazon.com Inc. and Expedia Inc. each trail domestic competitors.

``To be successful in China, you have to know Chinese tastes, Chinese customs, Chinese people,'' said Evolution Securities's Huang. ``That's harder for an American company.''

To contact the reporter on this story: John Liu in Shanghai at Jliu42@bloomberg.net

Last Updated: July 25, 2007 16:09 EDT