China's Internet industry can't seem to stay out of the limelight. That's not a surprise. In a country that is flocking online by the millions, the social, economic and even political force of the Internet is formidable. And it's likely to stay that way for some time, according to Robin Li, the multimillionaire founder and CEO of Baidu, the country's largest search engine. In a recent interview with China Knowledge at Wharton, the 42-year-old, Beijing-based executive predicted that the number of Internet users in China could double in the next 10 years to nearly one billion.
That's both a threat and an opportunity for Baidu. With May marking the start of a spate of U.S. share offerings from a Who's Who list of China's Internet companies, there's no shortage of competition wanting to nip at the lead Baidu has built since its own debut on Nasdaq in 2005, five years after Li launched the company. To stay ahead, what Li must prove to the markets more than anything else is that Baidu can innovate its way into the next growth phase of China's Internet. Now that archrival Google has been securely relegated to the number-two position in China, a big part of that means capturing far more of the corporate monetization of the web than it has so far, he told Knowledge at Wharton. Its latest initiative — making downloading applications, data and services easier through what the company calls "box computing" — will also need to gain more traction among users, and credibility among investors.
So far this year, Baidu is basking in the investor limelight, with its share price up some 50% since January. In late April, Baidu announced first-quarter net income of RMB 1.071 billion (US$163.5 million), a 123% year-over-year increase, on an 88% rise in revenue, to RMB 2.4 billion (US$372 million). During that earnings announcement, analysts wondered whether Baidu's pace of growth will continue through the year.
Baidu's growth projections won't be the only thing Li can expect to defend this year. Critics of the search engine giant accuse it of kowtowing to the Beijing government's self-censorship information policies, which require companies like Baidu to police and block content appearing on their sites. Shortly after Li spoke with Knowledge at Wharton, the government announced a new government body charged with overseeing the Internet, a move with potentially enormous implications for all of China's Internet firms.
In his discussion with Knowledge at Wharton, Li responded to those critics and offered his thoughts on what needs to happen for China's Internet players to capture far more of corporate marketing budgets than they have in the past, and why, in his words, the key to Baidu's own success now "is all about execution."
An edited transcript of the conversation appears below.
China Knowlege@Wharton: Baidu has been growing rapidly for the past five years and dominates the search market in China with more than 80% market share. Where do you see major opportunities for growth?
Robin Li: Right now, China is already the largest Internet nation in the world, with 450 million Internet users, but the penetration rate [internet users vs. total population] is only something like 35%. For the next five to 10 years, we expect the penetration rate to continue to go higher. The number of Internet users could double in this country, which will be a gradual process. Because of that, the whole Chinese Internet sector will continue to grow at a very rapid rate. On top of that, search is the most fundamental need for Internet users.
In the past 10 to 15 years, most companies' Internet activities in China have been consumer-oriented or pretty much entertainment-centric. But the business model for search is to charge enterprises for advertising or promotional activities. This kind of market has not been very well discovered by Chinese enterprises. That's why although the Internet penetration rate of 35% is higher than the world average, the paid search market in China is a lot lower than the world average. It's about 3% of GDP, while the world average is about 6%.
We think that although Baidu experienced growth over the past years, the absolute market size, in dollar terms, is still relatively small, smaller than in countries like the U.K. We do expect the Chinese search market to grow much faster than the overall Chinese Internet market, which grew faster than world average too.
China Knowlege@Wharton: What potential threats could undermine these opportunities? What is Baidu doing to prepare itself for the threats?
Li: Since we already have a very dominant market share, the biggest threat will be execution — how do we keep execution very efficient so that Chinese enterprises are well educated and can move online faster. The second threat is that the Chinese Internet landscape is changing very quickly. There are all kinds of new products, new consumer behavior and new trends. We need to be able to adapt to all kinds of change. For example, social networking has become quite popular in China and elsewhere, so we need to consider whether it will cannibalize our search activities.
What we've been doing over the past years has been to add social elements and functions to our search service. Right now, about 25% of our traffic is social search, so we feel we are very well positioned to embrace changes like this.
China Knowlege@Wharton: What impact did Google's retreat from China have on Baidu's business? Is it true that Baidu is following Google's lead?
Li: Let me first give you a little bit background on Google's China operation. Google set up its China operation back in July 2005, one month before Baidu's IPO on Nasdaq. At that time, it had more than 30% of the traffic share of Chinese search. By the end of 2009, right before it announced the retreat, its traffic share had fallen to below 20%. After about five years in China, it lost a lot of money and also traffic share and users. It was natural Google felt unhappy and decided to do something dramatic.
After it announced the retreat, it still kept a tight operation in China, with hundreds of people, and has a sales force here. Although the website was redirected to google.com.hk, it's still accessible. In fact, Google is still the number-two search engine in China, well ahead of other Chinese competitors.
As for the question about who is following whom, fundamentally we are all trying to satisfy our users' needs, especially their information needs. We were doing that for Chinese consumers before Google started its Chinese version, and we have come up with a lot of innovative products and features to satisfy our users' needs. That's why we keep gaining more traffic and market share from the competition.
As mentioned, about 25% of our traffic is social search. That includes products like Baidu Knows, which is a question-and-answer service, and Baidu Post Bar, which is a query-based message board — when a user posts a query, we not only provide a massive [response rate], but also direct the user to a dedicated area where people can share opinions and have all kinds of discussion. Baidu Cyclopedia is also very popular and provides a lot of authoritative information. We have a lot of user-generated content based on our services, and this is very different from what Google did in the past.
I did notice that Google renamed its "search group" to a "knowledge group" and is trying to encourage users to generate knowledge. That does sound familiar to me. We started to do that in 2003.
China Knowlege@Wharton: What has Baidu done differently than Google that allowed it to gain such a huge following in China?
Li: What I just talked is something very different and also our competitive advantage. We are very much user-centric or product-centric, instead of technology-centric. We don't try to kill Microsoft. Our dream is really to satisfy our users' needs. In addition to the innovative products we created for Chinese users, we have added a lot of innovative features to the web search. In terms of products, we have a much better Chinese name recognition system, and we have a lot of data and applications embedded into our web search platform.
In 2009, we launched our "box computing" initiative. For the first year, we added a lot of data into web search results. We launched the initiative as an open data platform. When you type in something, a lot of user querieshave endless answers. Users do not need to browse a lot of web links and research a lot of websites. They can get the answers from us directly. For example, if you type in "weather," we can tell you what the weather report is for your city.
In 2010, we launched an open application platform. For users who type certain words, we can show them certain applications. For example, when you type "Plants vs. Zombies," you can immediately play the game within the search's result page. Users can enjoy this without leaving Baidu. A lot of third-party developers are submitting this kind of application to our web search results.
We expect users will increasingly depend on our search box for not only traditional searches, but also all kinds of computing needs — data, applications or whatever.
China Knowlege@Wharton: How do you balance government requirements with the open display of content? What's the biggest challenge you've faced regarding this type of issue?
Li: Any country has its own legal system. In China, there is a certain control over content. As a China-based company, we need to respect that, and do our part to make sure information deemed illegal are censored or filtered out. But we have found that Chinese users are not that very bothered by that. Most users come online looking for entertainment-oriented and work-related content. The majority of Chinese users are not really interested in politically sensitive information. We do have to maintain a team to do this type of work and make investments to make sure that we abide by Chinese law. I guess that's the price you pay for operating in any environment.
China Knowlege@Wharton: Companies like Google have found it challenging to compete against the rise of social media. How has this trend affected your business?
Li: As mentioned before, a very significant percentage of our traffic comes from social search and we have been [achieving] that for quite a long time. In 2003, we launched our Post Bar and we started using user-collected efforts to generate content in real time for the web. That was especially needed in China at that time because there just was not enough Chinese information available online. We kind of had to find ways for our users to generate content for us.
We also face competition from other Chinese companies coming from more of a social networking background. For example, Tencent owns the largest social network in China, and it started competing with us on Chinese search quite a few years ago.
For Baidu to go on gaining ground on Chinese search, we have to keep moving in terms of traffic share. It's what we already been doing for many years. We have access to a lot of real-time information and user-generated content from Baidu products. We feel pretty good about it. We will continue to add features, including some invented by the mainstream social network site. We will embrace and extend that to make sure our users can generate high-quality, real-time content for other Baidu users to search.
China Knowlege@Wharton: Is your greatest competition from other companies in China, elsewhere in Asia or from Western countries?
Li: I'd say that the biggest threat is execution. The Internet market is huge, even the Chinese Internet market alone — it's large enough to accommodate quite a few successful companies.
We have a dominant market share for Chinese search, and the search market will continue to grow at a very rapid rate. As long as we can keep improving execution, we will be able to grab every opportunity. Competition is coming from all directions — Chinese companies, Western companies — but that is minor. It's all about execution for Baidu.
Right now, the number-two player in Chinese search is still Google. From a direct competition point of view, I would say Google is still our direct competitor.
China Knowlege@Wharton: It's been said that Chinese companies are joining foreign companies in China in raising concerns about intellectual property (IP) theft. What's your assessment of whether things are improving? What are the main challenges in this regard for a company like Baidu and Chinese startups?
Li: We do recognize that there are IP issues for Chinese Internet. But things have improved significantly over the past few years and we are pursuing all kinds of opportunities because of that.
For example, we launched a website called Qiyi, a Baidu-controlled independent company, which provides online video services, with all videos licensed from the copyright holders. That has been growing rapidly. After its first year, it now reaches about 150 million users and the traffic level has been growing.
We are very optimistic about the future of IP issues and we will continue to do our part to promote that. We will be launching a music service soon, which consists of only licensed music from record companies. That will help improve the overall IP situation for the Internet in China.
China Knowlege@Wharton: What is Baidu's strategy on mobile search?
Li: Mobile is going to be very popular. In China, we already have several hundred million or even more mobile phone users and Internet access from mobile devices is also getting more and more popular. Our mission for the future is what we call "box computing," which I explained.
For mobile, it's the same thing. In the future, the moment you turn on a mobile device, within one second, you will be able to access a box, which would be very much like search box. Just type in your request, and we will be able to deliver the content, data, application or service. That's our mission. We are working very hard toward that goal and we are moving a lot of our existing PC-based web products and services to the mobile platform.
China Knowlege@Wharton: Baidu is launching many products and services on its platform, including gaming, desktop software and instant messaging. What criteria do you take into account when planning an expansion strategy? In other words, how do you decide what to do and what not to do?
Li: Our core business is search. A lot of the products you mentioned add strategic value to search. Some products can enhance the experience or help to distribute our search box. For example, software, either a messenger or tool bar, will help place our search box on a lot of desktop computers, so users have easier access to Baidu search services.
We are getting into other types of business because we think they can greatly leverage our market position in search, which we call a "landing page strategy." When people do a search, [they end up with] a lot of results or links to different services. If we think there is enough user need or we can do a better job in a certain area, we will try to do it. Qiyi.com, the video site, is one example. People come to Baidu a lot to search for video content, and we feel that Qiyi can provide high-quality, licensed video content to our users.
We are also investing in e-commerce initiatives, because we think Baidu as a search engine will be the biggest beneficiary of the flourishing e-commerce market. We have an initiative to make sure e-commerce will grow faster and encourage companies to come to Baidu to place ads.
China Knowlege@Wharton: Some big clients are complaining the search ads rate on Baidu have increased too rapidly and are threatening to leave. What would be the impact on your business if that were to happen? Has that changed your focus on small to mid-sized enterprises (SMEs) as clients?
Li: We have more than 200,000 customers and advertisers. The majority of them are SMEs. But what we have seen over the past couple of years is that larger companies are growing faster in terms of revenue contribution. Paid search in China is still new, and most enterprises don't know the true value of this new marketing method. So we need to continue to educate the market.
In general, smaller companies are the first to try anything new and larger companies are usually more conservative and move more slowly. But many larger companies have started to realize the benefits of search marketing, so they have been allocating increasingly larger portions of their ad budgets to the Baidu platform for the past couple of years.
For quite a while, larger companies will be a bigger driver of our revenue growth. So we aren't seeing resistance. We are seeing is that especially the larger customers keep coming to us and asking for more traffic, more inventory. They always want to buy more clicks from us, not less. And the nature of the search engine is really an auction system, which means that the more clicks you want to buy, the higher the cost per click will be. As time goes on, more companies will realize that, compared with other type of marketing, search marketing will continue to be the best choice for them.
China Knowlege@Wharton: What is the future of the search market in China? What will be the dominant trend?
Li: Box computing is the future of Internet search, especially in China. In the past, people only came to a search engine for information. But in the future, search will be able to do a lot more than just find information. You can find data, applications and services, and you can also publish something.
Recently, we launched a service that helps users publish their micro-blogs, or Tweets, from the Baidu search box. When you type in a sentence in the search box, our search engine will automatically recognize that it is something you want to publish instead of search. Users will be able to do almost anything they can think of from a single simple search box. That is our mission for the future of search.