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Baidu Emerges as Winner After Google Ends Conflict With China

Baidu Inc. office in Shanghai
A pedestrian walks past the Baidu Inc. office in Shanghai. Photographer: Qilai Shen/Bloomberg

After winning permission from China’s government to continue to operate in the country, Google Inc. must now fight for relevance as Baidu Inc. extends its dominance in the world’s largest Internet market.

Uncertainty over whether Google would be forced out of China, prompted some advertisers to switch to Beijing-based Baidu. Google had its license renewed last week after it stopped automatically sending Chinese users offshore.

“There is a big gap between Baidu and Google, and that gap has got bigger,” said Vincent Kobler, managing director of Emporio Leo Burnett, a Shanghai advertising agency that specializes in online marketing. “It’s going to be tough for Google, even with the renewed license, to gain market share.”

Google’s market share in China fell to 30.9 percent in the first quarter from 35.6 percent three months earlier, according to data from research firm Analysys International. Baidu’s share increased to a record 64 percent from 58.4 percent, according to Analysys.

“It won’t be easy for Google because its service has been diminished in the past few months,” said Jake Li, an Internet analyst at Guotai Junan Securities in Shenzhen. “Baidu is likely to stay ahead.”

Extra Step

Last month, to remain in compliance with China’s laws while also ending self-censorship, Google added an extra step for Chinese Web surfers, directing them to a landing page that in turn pointed them to the Hong Kong site. It then submitted a revised application to renew its license.

Adding another complication for Chinese Web surfers will cost Google, Gene Munster, an analyst at Piper Jaffray Cos., said in a July 9 research note. Every extra step added to the search process will lose users, he said.

Google always seeks to improve the quality of its service to users, spokeswoman Marsha Wang said. She declined to comment on the company’s sales and market share in China.

“Our position has always been the uncertainties surrounding Google have had no more than a marginal impact on our revenue, and I don’t see any reason why this changes things,” said Kaiser Kuo, Baidu’s spokesman in Beijing.

Google rose 2.4 percent to $467.49 on the Nasdaq Stock Market on July 9. The shares declined 25 percent this year, compared to a 73 percent gain by Baidu’s stock.

Largest Market

China had 384 million Internet users at the end of 2009, the government estimates, more than the U.S. population. That may grow to 840 million by 2013, according to EMarketer Inc.

Google began redirecting users in China to an unfiltered site in Hong Kong in March, a practice the country’s government disapproved of. The U.S. company, based in Mountain View, California, said in January it would no longer comply with Chinese government requirements that websites self-censor content.

Baidu in April said it benefited from Google’s “semi-exit.” The Chinese company expects “healthy” growth in customers and average spending by clients will continue, Baidu CEO Robin Li said in a conference call in April.

“Baidu is willing to do whatever the government wants, to play by the rules. That’s to Baidu’s benefit,” said Jason Helfstein, an analyst at Oppenheimer & Co. in New York. “Google is trying to do things that they think are the right thing to do, even if it has negative business implications, naturally that has been shareholders’ gripe.”

Lost Partnerships

Ending self-censorship also cost Google partnerships with mobile phone service provider China Unicom (Hong Kong) Ltd. and Web portal Tom Online Inc.

Google had said in January it would stop censoring content and threatened to exit the Chinese market after cyber attacks originating from the nation targeted its systems.

The “highly sophisticated” attacks were aimed at obtaining proprietary information and personal data belonging to human-rights activists who use the company’s Gmail e-mail service, it said.

Bank of America Corp.’s Merrill Lynch estimated in April Google would generate $160 million in sales this year from China. That’s less than 1 percent of the company’s projected revenue this year, according to the average of 29 analyst estimates compiled by Bloomberg. It earned sales of about $335 million from China in 2009, according to Analysys.

Since it began redirecting Chinese users, Google’s search results have been screened by China’s so-called Great Firewall, a government monitoring system that blocks overseas services such as Facebook Inc. and Google’s YouTube.

The firewall limits Chinese Web users’ access to information on topics ranging from Tibet’s independence movement to the 1989 crackdown on protesters in Tiananmen Square.

“Until Google develops a deeper understanding with regulators in China, Google’s China business remains at risk,” said Sandeep Aggarwal, an analyst at Caris & Co. in San Francisco.

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