David WolfBy David Wolf
The newest war on the Internet will likely be called the Battle of the Search Engines. This fight pits Google against Yahoo against, in an Austro-Hungarian kind of way, Microsoft. The lines have been drawn. A little over a week ago Yahoo, on the eve of its rival's IPO, dropped Google as a search-engine on its popular global sites and substituted its own technology. According to reports on CNET's News.com, a legal piff-paff has already begun over who owns what intellectual property in these sites. And the level of public rhetoric between the companies, never warm, has begun to chill noticeably, just as everyone from the mainstream press begins assigning their correspondents to cover the battle.

Ignore all of that.

Ignore the IPO. Forget the court battles. Disregard the rhetoric. All of that is diversion. The real battle of the search engines, the one that will determine which of these companies will lead the industry, and which will wind up being number two, will be fought right here in China.

For all of the reasons that makes China strategically important to so many companies (or, at least makes China important in the minds of their CEOs), China is essential to Google, Yahoo, and MSN. It's the last great virgin territory, with what is about to become the largest market of Internet users on the planet, and the growth continues. Everywhere else in the world, the stakes pale. Win China, and you lead the world.

Just over two weeks ago, and tantalizingly on the cusp of the company's much anticipated IPO, search engine Google opened an office in China, primarily to sell its AdWords service in Chinese. This was Google's second significant step into the mainland, the first taken when Sina dumped its affiliation with a government-sponsored search engine and signed an exclusive partnership with Google.

Yahoo has been here a while. As a portal it's arguably #4 behind Sina, Sohu, and Netease, but that battle is still anybody's game. Yahoo's recent public humiliation of Google on the search engine front will intrigue both potential partners and the market, undermining what should have been a slam-dunk for Google–search engine partnerships everywhere. And what will make Yahoo a real power player in this market–Overture, 3721, and Jerry Yang–are weapons Yahoo is only now beginning to load and aim.

All of this is happening while China's portal/search sites (Sohu, Netease, Sina, 3721, Yahoo) have all reached maturity as businesses. Ad revenue online continues to skyrocket, with Sohu alone experiencing a 120% jump in advertising income in the fourth quarter.

Google has pulled off a neat trick. It has managed to put its search engine in front of Chinese users without going through the niceties of establishing a presence onshore. It has set up AdWords as a funnel for cash leading right back to California. And it has begun to build a loyal following among Chinese users without arousing the concerned interest of local regulators.

The question of how long the government will allow that situation to continue is, as always in China, a matter that must hover near the top of the minds of Google and its platoon of attorneys (not to mention its future shareholders–at least the institutional guys sophisticated enough to understand the environment.) Beyond the legal and administrative challenges, however, Google's stealthy, low-overhead entry will carry other costs.

The market will not stand still. China's Internet users have the same appetite for "more and better" that their counterparts have elsewhere in the world, but they operate within a lifestyle and cultural context that would be alien in Google's main markets. The Battle of the Search Engines in China will be won by the company who can innovate the fastest, who can consistently deliver features to make its generic global services more relevant and exciting to Chinese users, and who can cleverly find ways to make the more demanding of those users actually pay for the service.

To build that kind of momentum and relevance requires more than just an ad sales operation and a search algorithm that handles double-byte character sets. It requires a stable of smart, tuned-in locals who understand in their guts not just how 'Net users in China think, but how and what they are thinking right now. Google is in the market, without doubt. Whether it is in touch with the market remains to be seen, and will be the ultimate determinant of whether it stands a chance.

Welcome to China, Google.

About the author:
Silicon Hutong is an ongoing series of thoughts and commentaries by David Wolf, President and CEO of Wolf Group Asia'a management advisory firm providing strategic communications counsel to technology, media, entertainment, and telecommunications companies in Greater China and the Asia-Pacific region. David's opinions are his own and do not reflect those of either WGA or it's clients. Past articles can be found at www.chinatechnews.com, the Silicon Hutong Blog can be found here and David himself can be contacted at [email protected].


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