China's Silicon Dragons

Tech analyst Rebecca Fannin

By Published on .

Chinese search engine Baidu has a little secret. It never could have beaten Google in China without actually copying the dominant American's brand formula for making money--paid search.

Today, pay-per-click ads account for as much as one-third of online ad revenues and are the primary revenue stream for search engines in the consumer market. But it wasn't always clear that sponsored ads on search engines would work.

Baidu is far from the only Chinese Internet start-up that has discovered that online advertising is their key to survival. Several emerging web 2.0 companies I profile in my new book, Silicon Dragon: How China is Winning the Tech Race, are relying on online advertising as one of the key ways to prop up their financials.

When Baidu CEO Robin Li decided to give paid search a try in 2002 to bring in revenues as cash was dwindling at his start-up, Google had just begun to make money from this concept. He had to convince his board of directors that paid search would bring in desperately needed income and salvage Baidu from potential bankruptcy.

Mr. Li battled with his board for months over his idea to follow Google and its formula for monetizing searches over the Web. The board eventually approved his business plan even though it was a highly risky move. Shifting to paid search as a strategy meant scrapping an existing business model and going head-to-head with customers--plus doing battle with the giant Google on its home turf in China.

But there was little choice. Baidu had already tried three business ideas – a search engine for portals, a content delivery network and a search and data management service for large Chinese enterprises. All failed.

This Google-like attempt only succeeded after Mr. Li initiated a grass-roots effort to educate businesses in China that online advertising could work. He set up a national network of advertising resellers in 200 major Chinese cities to educate newly capitalistic businesses about the power of online advertising. It was nitty-gritty work. Within two years after this key shift in its business plan, Baidu, like Google in the U.S., began making money from paid search.

What's more, Baidu took a commanding lead in China over its American competitor Google. Today, Baidu claims a market share of 58 percent compared to Google at 21 percent, according to Beijing-based research outfit Analysys International. Baidu is also China's leading Web site, outdistancing 7th ranked Google. And it is a Nasdaq superstar with one of the best-performing stocks on the U.S. exchange, making founder Li a multimillionaire from his share of the firm's riches.

The risk-taking Mr. Li has proven to be one of the pioneers in China. In 2007, the paid search market in China doubled to $500 million, Analysys reports. Meanwhile, the research firm projects ads on Chinese Web sites will nearly double to $1.5 billion by 2010 from $740 million in 2007. No wonder there's a gold rush among Chinese web 2.0 brands to get to the gems in this hyper-growth market, home to some 162 million Internet users.

The Chinese equivalent of video sharing site YouTube, a start-up in Shanghai called Tudou.com, is not a money maker yet. But the high traffic site, which streams as many as 25 million videos daily, is discovering the beauty of video ads by big brands Adidas, Lenovo and Sony as a source of revenues.

Founder Gary Wang, a returnee to China with a power-packed resume including degrees from Johns Hopkins and INSEAD plus experience running an online business for German media conglomerate Bertelsmann, has taken lessons from both Madison Avenue and Silicon Valley in structuring his business. He has even granted stock options to his new employees who work in a funky loft 24 hours not far from Shanghai's public plaza, People's Park.

Likewise, Fang Xingdong, the founder and CEO of China's first blogging company, a Beijing based start-up called Bokee (which means blogging in Mandarin), is looking to online advertising as a way to keep his start-up afloat. Last year, Bokee lost $4 million and was forced to lay off one-quarter of its 400 employees after a visionary plan by Fang to create a massive blogging portal failed to support operating costs.

Now, online advertising is being looked at as a survival tactic, along with subscriber fees for premium content. To the rescue are some $2 million in online advertising that Bokee has lured in from big-name clients IBM, Amazon and Hewlett-Packard.

Even American automaker Ford recently tried out an innovative ad campaign on the blogging site that succeeded in attracting 1,200 prospective buyers. The Ford campaign had Formula 1 race car coaches posting blog diaries about training to be a race car driver. Bokee invited users on its site to participate in a Q&A contest about race car driving, with prizes awarded to the winners. The campaign set a new standard for highly targeted and imaginative advertising on Chinese web 2.0 companies.

Taking online advertising into new territory, the quirky-named Chinese start-up Oriental Wisdom sells financial services by mobile phone to Chinese consumer, and relies on mobile marketing campaigns for its livelihood. Forget about the old 30-second television commercial. Oriental Wisdom has developed a mobile marketing magazine with jazzy graphics to bring in clients. Content for the M-magazine comes from advertisers in a blend of advertorial with handy financial tips from insurers, banks and mutual funds companies.

Oriental Wisdom and a host of Chinese startups – from e-commerce, to search, web 2.0 and wireless – are creating new standards nearly every day. Look to China to continue leading the way with tech and advertising innovations as the communist country embraces capitalistic practices in the 21st century – and the balance of power shifts eastward to this huge populous nation.


A former editor at Advertising Age and Red Herring, Rebecca Fannin is the author of the new book, Silicon Dragon, published by McGraw-Hill. She is a contributor to Inc. and Worth. Her book can be ordered on Amazon.com.
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