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The Quest to Click in China

By Heather Green The search wars raging in the U.S. are spilling over to the Middle Kingdom. On June 21, Yahoo! (YHOO) debuted a Chinese-language search service called Yisou. That follows hard on the heels of rival Google's June 15 announcement that it and a group of investors had bought a stake in Baidu, one of China's leading search engines. Analysts expect other U.S. companies, including Amazon (AMZN), Microsoft (MSFT), and America Online (TWX) to join in the Chinese search battle soon.

Little wonder. Thanks to backing from Beijing and strong economic growth that's putting more computers in Chinese homes, the country's Internet usage is booming. China now has around 80 million subscribers, second only to the U.S. And the Middle Kingdom is adding more new users annually than any other country in the world. If forecasts from investment bank Piper Jaffray hold, around 153 million Chinese will be online by 2006, and China will surpass the U.S. in Web users.

GOING LOCAL. The boom has led to a flowering of Chinese Internet startups, including search engines. And it has attracted the attention of the American heavies, eager for new growth and dead-set on not being left in the dust by U.S. rivals or Chinese upstarts. Already, there's no shortage of competitors. The country's top three portals, Sina (SINA), Sohu (SOHU) and NetEase (NTES), all offer search tools. The leading Chinese-language dedicated search services include 3721 Network Software, Baidu, and Zhongsou.

Sina, Sohu, and NetEase all use Zhongsou's search offering, although Sohu plans to launch its own in July. The Chinese are also turning to foreign sites, including Yahoo, Microsoft's MSN, and Google, which offer Chinese-language versions of their flagship services. Yet, increasingly, companies outside of China are convinced that they need to have locally built services to succeed in the long run -- hence Google's stake in privately held Baidu, a Chinese-born outfit that also sells advertising using the pay-per-click model.

Yahoo, meantime, is using the expertise of 3721, which it bought last November for $120 million, to offer a multipronged strategy. 3721 provides software that surfers download and install on their computers to do keyword searches. Around 450,000 advertisers and Web-site publishers pay annual fees to have their products and services advertised next to those keywords.

However, acquiring a rival is just the first part of Yahoo's strategy. The next step is building the dedicated Yisou search site using technology from 3721 as well as from Inktomi and Overture -- two U.S. search engines Yahoo acquired last year. The idea is to blanket Chinese Web surfers with a variety of options. "Our understanding of the local market will be instrumental to success," says Vishal Makhijani, vice-president of international search at Yahoo.

50% ANNUAL GROWTH. Some might consider all the jockeying for position a little premature, given that China's advertising and e-commerce markets are in their infancy. That's due in part to the low salaries: Individuals in China earn only $1,062 annually on average, vs. $37,312 per person in the U.S., according to Morgan Stanley (MWD). Low credit-card use and unreliable distribution systems are also factors that slow e-commerce development.

Nevertheless, analysts say the market is beginning to take off. Online ad revenues are under $100 million but should grow 50% this year, estimates Safa Rashtchy, an analyst at Piper Jaffray. Booming subscriber growth and a burgeoning ad and e-commerce market are likely to convince other businesses to join the search fray. And that could include outfits that have been trailing players in the U.S, such as AOL and Microsoft, says Kevin Lee, CEO of, a search-engine marketing firm.

With a young market that's already large and only going to increase, it's too much of a temptation to pass up. Green is Internet department editor at BusinessWeek in New York

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