China Mobile, China’s largest cell phone carrier, and Google, the world’s largest search engine, announced on January 4 a “mobile search” partnership in China. Only nine days later, China Unicom, China’s second-largest cell phone carrier, was reportedly in talks with Baidu, the Chinese search engine, about developing a similar Internet search service for mobile devices in China. The news marked the spread of search-engine warfare from computers to mobile search. For both Baidu and Google, this kind of partnership is expected to help them win a significant number of subscribers in a short period of time. But will that happen? Will Google and Baidu’s entering reshape the mobile search industry in China? And will the other, smaller players lose ground? Knowledge at Wharton talked to a few experts about the industry’s current status and its future.
A Whole New Industry
Matt Chou is a partner at a venture capital firm, speaks only English, and has to travel often to China for business. He has found it easy to search for addresses in English on his cell phone and then ask his cab driver to take him wherever he wants to go based on the search results in both English and Chinese. “I like mobile search because it’s very convenient and I can use it anywhere and anytime,” he says.
Young people in China have always been on the forefront of everything new and trendy. Li Ying, a 20-year-old college student in Shanghai, often searches for pictures and different cell phone ring types on her cell and then downloads them directly. “That’s why I change my cell rings all the time,” she says. Statistics show that consumers between 19 and 29 years old represent the biggest market for mobile search.
According to data released on January 23 by the China Internet Network Information Center, about 1.7 million Chinese now surf the Internet via their cell phones, and 8.2% of them have used the search function. But some industry experts view the $1.7 million number as way too conservative.
Back in November 2004, Baidu had already launched the WAP (or wireless application protocol) type of search product, which allows consumers to look for information easily just by typing http://wap.baidu.com on their cell phone. In addition to this most commonly-used format, some mobile search companies also provide mobile search service via SMS and voice function.
Carriers’ Double Roles
Some commentators believe that the alliance — based on the search engines’ technological advantages, brand recognition and the mobile carriers’ huge subscriber base — would be a perfect match. However, things may turn out differently. For example, the partnership between China Mobile and Google hasn’t shown any noticeable effect. A key reason, according to one insider, lies with the dominant role played by China Mobile in the arrangement.
Zhu Bo, founder and chief executive of Cgogo – one of the first mobile search providers in China –- says that, “in fact, we have been providing both platforms and technology to China Mobile and Unicom, but neither of them has promoted the Cgogo brand. The decision by China Mobile to team up with Google is a strategic one instead of being pushed by technological concerns. I don’t think its ‘Mobile Search’ service will promote the Google brand, because China Mobile is not likely to give up its [strategy] of only using its own brand. The most likely solution China mobile could offer is to identify ’powered by Google’ at the bottom of its search page.”
According to Liu Bing, an analyst at BDA China, a Beijing-based market research firm specializing in China’s hi-tech sector, “mobile carriers look to search engines like Google and Baidu for their technology capabilities, while the carriers maintain control over the business. As a result, Google and Baidu can only get a small share of profits and have limited say in the partnerships.”
Increasingly, in order to increase their profits, China Mobile and China Unicom have sought to provide value-added services, such as mobile search, themselves instead of just being data transmission channels for mobile value added service providers. Their monopoly status in China’s telecommunications industry gives them unique advantages in this endeavor because they are also supervisors over the entire mobile industry. As a result, the carriers have two simultaneous roles in the mobile search business — as competitors and supervisors. Consequently, every move they make has a big impact on the industry.
Since 2006, rumors have been circulating about China Mobile seeking to “kill” individual WAP sites that are independent of its system. It has now become clear exactly how the carrier is going to do that. According to a story published by China Business News, China Mobile has finished restructuring its systems in all but two provinces, Jiangsu and Guangdong. The restructured systems are able to distinguish independent WAP sites from the rest and charge higher fees to users of these WAP sites, thereby hindering their development. “The move is going to cost some small- and medium-sized companies, while benefiting the carrier’s partners,” BDA’s Liu Bing says.
Carriers’ double roles, according to Zhu, “are not going to change, at least for the next five years, but with the launching of 3G in China, the Ministry of Information Industry (MII) may give out more licenses to carriers other than China Mobile and Unicom. And that could diminish the monopoly status currently enjoyed by both carriers, benefiting some small- and medium-sized search companies.”
Online Model vs. Mobile Model
The question of which model can generate the most profits has always been hotly debated. According to a report by iResearch Consulting Group, a Shanghai-based market research company for the Internet industry, starting this year, the mobile search industry is going to enter a five-year “growth” period, with the size of the market reaching 23 billion yuan, or almost $3 billion. Analyst Hou Tao at iResearch notes that the “majority of the $23 billion yuan are mobile online traffic fees goes to the carriers, and revenues of related service and products goes to companies in the search results. Less than 20% will be pocketed by search companies.”
At present, providers of search engines adopt the same online model to mobile search, which means they rely on sponsored keywords for profits. However, it’s a challenge to copy this model on the mobile phone. Indeed, three factors could limit the model’s success, says Zhu. “First of all, it’s impossible to place sponsored results on the right-side of cell phones’ small screens and the normal search result on the left-side, as on the PC screen. Secondly, the ads must be highly relevant so as not to turn off the cell phone users because users are charged by traffic for every kilobyte they browse. Finally, most existing mobile users are not the target audience for online ads. They bring huge traffic but are of limited commercial value. Consequently, advertisers are adopting a wait-and-see attitude toward placing ads on mobiles.”
In addition, some search functions prove more popular than others. According to a January 17 report by mInfo Information Technology Co. in Shanghai, the most-searched information last year includes restaurants, jokes, cell ring tones and pictures, news, stock quotes and weather forecasts. Nearly half of all the mobile searches involved local information.
“Search engines like Baidu and Google are good at offering web page searches, content searches and WAP site searches, while other small- and medium-sized providers are good at providing local information,” Hou Tao of iResearch said.
A lot of those smaller search engines used to be services providers that have been offering products like SMS, MMS, ring tone and mobile games for years. These companies are seeking new business models for their mobile search business based on their resource network and mobile operation experience.
Alliance seems like an opportunity. A case in point is UUCUN, founded in November 2005. Its business model — one dubbed as a “mobile advertising alliance” — is quite unique. Members of the alliance are individual WAP sites, while UUCUN acts as the agent between them and advertisers. Specifically, UUCUN provides its WAP members with search platforms and ad information. WAP sites selectively place ads on their sites and, as a result, share advertisement revenue with UUCUN. According to UUCUN president Zhang Zhendong, the company has so far partnered up with nearly 1,000 independent WAP sites and its subscriber base has been growing 30% each month.
The Advantage of Being Big
Although challenged by the dominance of the mobile carriers and the non-applicability of the online business model to mobiles, the mobile search industry could still be profitable for the search-engine giants in the future.
For example, in finding opportunities to cooperate with mainstream handset manufacturers like Nokia, Motorola and Samsung, the big search engines’ well-recognized brands and resource advantages would make the win within their grasp. Baidu has been cooperating with Nokia to develop preinstalled mobile search software for the latter. In addition, given the alliances with China mobile and China Unicom, Google and Baidu’s search engines could lock in dominant positions in mobile operators’ customized handsets.
“The advantages enjoyed by Google and Baidu will become more apparent as the market develops and matures,” BDA’s Liu Bing says. “At the same time, their mobile search operation experience with international carriers in overseas markets will benefit their Chinese businesses, too.”
Even if Baidu and Google’s own mobile search business fails to outpace the competition with their smaller rivals, Baidu and Google still have one additional trump card: merger. Most small players will not turn away a good offer by the search giants. In addition, as one industry insider put it, “the winner-takes-all phenomenon of the internet business may very well repeat itself in the mobile search market.”