Thursday, July 20, 2006

Baidu, the leading search engine in China, was under storms of criticism from users and media in the second largest internet market in the world.

On July 10, Baidu axed off its Enterprise Search Business three days before the company's first user mega meeting in Beijing. This is the second department-level lay-off Baidu did in the second quarter. In May, the company quietly cut a department called Product Marketing Development department with nine employees. It was told by insiders that all the actions were to boast a mirage of the Chinese search engine's hyper-growth and maintain its high P/E ratio. Like other listed foreign companies at NASDAQ, Baidu had to comply with SOX act from July 15. The new regulation required companies to deduct their employee's stock options cost from the profit. So it was not surprising that Baidu rushed to a bloody downsizing and robbed the stock options from the innocent employees. The profit contribution from stock options was estimated to around 20 million Chinese yuan (USD 2.5 million). This will certainly make its income statement more "sexy" on July 25, the date when Baidu need disclose its Q2 earnings.

However, Baidu was not lucky this time. It avowedly ignored the labor law in China and asked the employees to get out in 4 hours without any notices in advance. According to Chinese labor law, employers need officially inform employees one month ahead when they decide to terminate a job contract. One victim in May's layoff has sued Baidu already. Other angry engineers hurt by the newly cutback were preparing to conduct a suit over Baidu and get back their wealth. "I was selected as one of the top guns and my salary was increased one month ago. But I was fired suddenly because of under performance without any notice in advance. This is ridiculous," one victim complained to journalists. Perhaps it is more ironical if you know that Baidu has just been selected as one of Most Admirable Employers by a HR magazine in June. The scandal quickly becomes headlines of all major newspaper and portals last week.

However, all of Baidu's efforts paid off. Its shares shot up Monday morning as an analyst from Brean Murray Carret & Co. predicted the company would keep up its "rapid growth". In a survey of distributors, Michael Tieu, the analyst concluded that all of them favored Baidu.com. "They didn't understand Google Inc.'s auction-style bidding process", he noted, and "their return on investment with the U.S. search engine wasn't as great". Obviously Tieu did not quite understand the search engine business model in China. Chinese search engines leverage distributors to sell sponsored links to small and medium size enterprises, in stead of the direct sales model. So what distributors really care are total numbers of clicks, not returns of paid search-ads. When Google and Yahoo was annoyed by click frauds, you cannot image that some distributors are one of three key sources of invalid clicks (the other two are competitors and paid search ad affiliate spammers). Moreover, to help its distributors and itself get more bucks, Baidu actively mixed ads with original results, misleading Chinese searchers to click more. Few searchers can tell the difference between original results and sponsored ads because the company deliberately makes them appear same. To maximize the revenue potential, Baidu often listed their advertisements among original ones as shown in the following picture.

The search engine's business innovations never stop here. Besides mixing ads and original results, it has successfully monetized users' trust and displayed all ads on the first page. For example, if you search for "cancer" on Baidu, the top ten results on the first page are all paid ads. This controversial monetization idea was first introduced by Overture and now completely replaced by Google's AdWords. But it is now widely adopted by Baidu and even became one of three relevance guidelines of Robin Li, the CEO of Baidu. "Relevance is best decided by how much you pay for us" described on the company's web site.

International entrants like Google and Yahoo all adopt a legitimate approach to paid search ads in China. The appearances of ads are different from original results on titles, abstracts and URLs. Ads also are highlighted with a light blue background for users to recognize them easily. Well, their returns for distributor may be lower than from Baidu, but they bring real value to SME clients. Those clicks are from users who want to find commercial information.

Tieu might not understand the nuance among search engines' varied business models in China. This reminded us a famous advertising slogan Baidu once coined, "I know you didn't know what I knew". The slogan was originally used to brag about Baidu's advantage on international rivals in searching Chinese language web pages. But it can be perfectly applied to investors and other audience outside of China too.

4 Comments:

Anonymous Anonymous said...

surprised to know that...

8:40 AM  
Anonymous Anonymous said...

If you search for "cancer" on Baidu, the top ten results are all paid ads? Can any Chinese help verify that???

8:42 AM  
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