The dispute between search engines and traditional media has ratcheted up a notch, led by News Corp. chairman Rupert Murdoch and emulated by a handful of news outlets that are considering blocking Google from accessing their paid content. In an argument that has gone on for years, Murdoch has accused the search giants of poaching content. “That’s Google, that’s Microsoft, that’s, a whole lot of people. … They shouldn’t have had it free all the time, and I think we’ve been asleep,” Murdoch was widely quoted as saying. He’s urging media outlets to fight back, and he’s leading the way, talking with Microsoft about listing News Corp. content only on its site, the Financial Times reported this week. One analyst quoted by Bloomberg News called the move an attempt to pressure Google into concessions.

“This is a game between different parties, and it is a cruel game too,” says Spring Liu of the Beijing-based law firm Guangsheng & Partners, who specializes in intellectual property litigation. “The major part of the value chain doesn’t get compensated, but the affiliated part gets a lot of compensation, which is not a good way to balance the system.”

The developments come as the newspaper business continues its decline. Newspapers and other print media, the music industry and other traditional content providers, who say they’re not adequately compensated in the current Internet ecosystem, face an uphill battle against the search engines.

It’s a battle being played out around the world, including in China. Not only Yahoo and Google but also China’s homegrown engines – including Baidu — perform hundreds of millions of searches a day. They present an attractive platform for advertisers, they’re reaping huge profits and they continue to grow. The traditional media, meanwhile, haven’t learned how to profit from the Internet. The question now is who will be the biggest winners and losers in what is rapidly becoming the world’s largest Internet marketplace.

Rampant Growth in China

Nowhere is the upheaval more clear than in China, where the domestic search industry continues its rampant growth. The advertising market in China grew 15% last year, reaching RMB 441.5 billion (US$65 billion), according to Beijing-based CTR Market Research Co. Search engines’ growth has been especially dramatic.

At Baidu, which has more than a 70% share of the Chinese market, revenue and net income grew at compound annual rates of 128% and 206%, respectively, from 2004 to 2008. Fiscal 2008 revenue was RMB 3.2 billion (US$469 million), an 83% increase from 2007. Operating profit was RMB 1.1 billion (US$161 million), a 100% increase. And net income was RMB 1 billion (US$146 million), a 67% increase. Its growth continued in the third quarter of 2009, with revenue and operating profit up 39% and 42%, respectively, from the same period in 2008.

Baidu’s growth is much more prominent than the entire online advertising market in China, which reached RMB 17 billion (US$2.49 billion) in 2008, up 60% from the previous year, according to iResearch Consulting, an Internet market research group. It predicts the amount will reach RMB 21.64 billion (US$3.17 billion) this year, which would represent a growth rate of 27%.

The picture is similar globally. Search engine marketing has sucked ad revenue from other media, especially print magazine ads, direct mail and print newspaper ads. It has taken a leading position in online advertising.

Google continues to lead the way globally. In a March report titled “Economy + Internet Trends,” Mary Meeker of Morgan Stanley indicated that Google had a 67% share of global online advertising revenue in the fourth quarter of 2008, compared with a 48% share in the fourth quarter of 2005. By contrast, Yahoo slipped to a 20% share in the fourth quarter of 2008, from a 33% share three years earlier.

A Formidable Business Model

While traditional newspapers have concentrated on providing quality content to paid users, search engines have concentrated on providing better tools to search users and online marketers. “Search engines have built an efficient bridge between the information and the users, which meets the demands of users in an age of exploding information,” says Fiona Zhou, an analyst for the Shanghai-based research firm JLM Pacific Epoch. “Because of this, they can aggregate a huge quantity of users in a short time.”

In 2008, the number of search queries in China reached 150 billion. China now has 244 million search engine users, more than any other country in the world. That number is expected to exceed 300 million this year.

Steven Ji, CEO of Sky-Tech, a Shanghai-based marketing service provider and an authorized agency of Google, says there is simply too much information online, and that users need a search engine to organize it. “Nowadays, you can not only search online web pages, but also news, music, video and pictures, which provides a rich source of information for users,” he says.

The growth in search has shown no signs of abating. The Morgan Stanley report estimated that search engine marketing grew 35% last year and took a 52% share of all forms of Internet marketing in 2007, up from 15% in 2003. Other Internet marketing forms, including banner ads, video and audio content, classified ads and e-mail marketing, declined or reached a plateau, according to the report.

The trend is clear: Search engines are taking an ever-larger slice of the online advertising pie, and newspaper gurus like Murdoch have ample reason to worry about the future of traditional media. Advertising is at the heart of the issue. Unlike traditional media, which provide general advertising that reaches a broad spectrum of readers, search engines can offer sharply targeted advertising platforms that businesses find attractive.

Ji of Sky-Tech says precision is behind search engine marketing’s increasing popularity. “Search engine marketing, which is based on keyword searches, has a very clear target. It can be placed where the client wants. For example, if I only want my ads to be shown in some particular regions in China, or I only want to reach customers in Milan in Italy, Google will make sure only users in these regions can see the ads at any particular time.”

Search engines use a pay-per-click model, which means a client pays only when the user clicks its ad. That makes advertising cheaper and more efficient. “With a few thousand yuan, you can place ads on search engines, and it’s very flexible,” says Zhou of JLM Pacific Epoch. “You can decide how much you want to spend, what the keywords are, and when you want to start, so it’s easier for small and medium-sized enterprises (SMEs) to control their budgets. This has created a big base of ad customers with limited advertising budgets that was not tapped in the past.”

SMEs contribute most of Baidu’s ad revenue. Big clients – defined as those that spend at least RMB 500,000 (US$73,530) annually on ads on Baidu – contribute only 15% of ad revenue, says Zhou. “The rest are all SMEs, and the percentage is similar in other markets.”

It’s also easier to quantify search engine ads’ successes. “We can provide a very detailed track report, including how much has been spent, which pages have been clicked, and the allocation of the users by regions, by time, and so on,” says Ji. All those features lead to a high return on investment, according to Ji, who adds that it is difficult to track such data with TV or newspaper ads, or even with banner ads online. 

High Profitability

Search engines’ advantages are reflected in the financial numbers too. As the financial reports of and Baidu suggest, search engines’ profitability is much higher than that of online media companies – not to mention print media., the biggest online media company in China, reported revenue of RMB656 million (US$96 million) and net income of RMB 114 million (US$16.7 million) for the third quarter of 2009. Baidu reported revenue of RMB 1.28 billion (US$187 million) and net income of RMB 493 million (US$72 million) in the same period.


Several factors contribute to search engines’ high profitability, Ji says. First, they have an enormous customer base. Google has more than one million distinct advertisers around the world, while Baidu has more than 300,000 in China.

Second, search engine marketing customers run ads on a long-term basis. “In traditional media or online media companies, the ads from a client will appear for a certain period, and then disappear,” says Ji. “But with search engines, you have to place your ads for a long time to observe the trends and accumulate recognition, which ensures that the revenue for search engines is long and lasting. Because when new customers come, your old customers are still there running ads, which contributes to the high revenue growth of search engines.”

Search engines also have lower costs than traditional media. “The marginal cost for search engine companies to have one more user is much lower than traditional media,” Ji says. “The costs increase if the user base has reached a certain size, but newspapers must produce and publish news and content every day, despite the associated costs.”

The Chinese market is effectively a duopoly, with the rewards flowing primarily to Baidu and Google. Baidu holds more than 70% of the market and Google nearly 20%. And the barriers to entry are high — it is costly to prepare a system that can handle search queries from millions of users, so it is difficult for new companies to break into the market, Ji says.

Eric Bradlow, professor of marketing at the Wharton School and co-director of the Wharton Interactive Media Initiative, says a major reason for the success of search engines is that people in “search mode” are more likely to be in “buying mode.” That is, people search for a specific topic and are more likely to be buying a product or looking for product information. This is known as “contextual” advertising, where the conversion rate is likely to be much higher, and it helps explain why Google has built a massive industry around search engine optimization for ads and keywords. “I project that this business is not only here to stay, but that it will gain prominence against other forms of advertising going forward,” says Bradlow.

The Dispute With Newspapers

Google sees the dispute differently than Murdoch does. The company sends more than 300 million clicks a month to newspaper Web sites and is in “full compliance” with copyright laws, a representative says. “We show just enough information to make the user want to read a full story – the headlines, a line or two of text and links to the story’s Web site. That’s it.” For most links, if a reader wants to see the entire article, they have to access the newspaper’s website.

However, the online information market has evolved, and as more and more individuals put news content on the Internet, it further erodes newspapers’ bargaining power. “Nowadays, any individual can disseminate information to the public, and user-generated content has become a leading source of online content, which has far exceeded the information produced by traditional media companies,” says Wang Wei, editor-in-chief of a free-subscription newspaper called City Guild in Shanghai. “This further pushes the growth of online information and justifies the increasing demand from users. So although Murdoch is right in protecting his content, Google will still prosper, because in today’s world, the information sources and channels are different.”  

“To produce content costs money,” Liu counters. “People need to get paid to create good and valuable content. There has to be a compensation mechanism for value. The traditional media industry has not fought back. Traditional media has its own value, but it has not been considered in the current Internet system. However, I believe we will build up this compensation mechanism for content providers in the future. The Internet is young, and the law has not had time to resolve this issue. When the majority of the print media goes Internet, things will change.”  

One of the challenges is technical, Liu says. Right now, it’s not convenient to pay a very small sum online for a deal; a user needs to pay at least several yuan (US25 cents or more) in an online payment. “If we could make it easy and convenient for users to pay a cent or two to read something or download something online, it will create a better environment for content producers,” Liu says.

Who Takes the Lead?

In China, as elsewhere, newspapers are suffering. “Almost all newspapers in China are trending downward,” says Wang. “The ad revenue from January to June this year of the two biggest daily newspapers in Shanghai dropped 25% year on year.”

Zhou says good content will always be in demand, though it may not come from traditional media companies. “The power of speaking has been decentralized over the years,” she says. “Now individuals can have blogs that attract a huge number of clicks. When you have traffic, and you have someone to package you, you will get money. The traditional media might have the strength and good taste to discover good writers. But overall, in terms of media forms, although the newspaper will not disappear, the new media will certainly take the lead.”

A balance point will be reached eventually, Liu believes. “The print media will not completely disappear, because there are always people who love to read papers and books,” he says. “The radio has not died, because when you drive a car, you listen to radio. But the print media will decline.”

Bradlow of Wharton says the real winner will be mobile advertising. As the quality of broadband increases and the desire for “anytime, anywhere” interactivity increases, the ability to deliver targeted advertising in real time is crucial. “See Google’s recent purchase of AdMob, a mobile advertising company,” he notes. “In terms of print media, no, it will not die, but their revenue model will likely change as they will have to give away a lot of content for free and have gated content as a revenue source. This will work as long as they have branded and valuable content.” 

Wang of City Guild expects future media companies to be multiform. “Print media has room to survive,” he says. “For newspapers, the majority will be free-subscription papers, and others will target a special group of paid readers. There are differences between the media forms, and when there is differentiation, there is room to grow. In the future, media companies will be consolidated across all forms, including TV, newspaper, Internet, mobile and so on.”

“Content can still make money,” Sky-Tech’s Ji says, “but you have to be unique, be focused and provide value. And I think search engines will prosper. The users will need to search for information or products anytime, anywhere, and will need to do it more frequently.”