China's Google Baidu is really China's Baidu Google

WHAT'S the fifth most popular website in the world? Ebay? CNN? Amazon? Actually it's Baidu. Bai who? The Chinese search engine has more visitors than any of those better known sites, according to Alexa Internet (Alexa's rankings are not 100 per cent accurate, but they do give a good idea of the relative standings of most major websites)

Baidu is often described in the media as 'China's Google'. With memories of Google's stellar IPO to lure investors, plus Baidu's proven popularity, it's not surprising that the Chinese search engine's recent IPO was a buying frenzy. The shares rocketed from $27 to over $150 during their first day, a new NASDAQ record. But investors who joined the rush thinking they were buying into the next Google may have been misguided. The shares have since drifted south (standing at $82 today), and even the investment banks behind the IPO say they are still greatly overvalued.

Baidu certainly looks like Google. There's an equally sparse white home page, decorated in simple primary colours, and centred on a plain search box. The similarities that helped pull in investors are quite deliberate. Media-savvy co-founder and CEO, Robin Li, worked at Dow Jones and InfoSeek in California during the dotcom boom.

Even Baidu's name and logo evoke Google. The name 'Baidu' references a line in a classical poem referring to a very large number, echoing Google's creative misspelling of Googol (10 to the power of 100). And in China, the Baidu logo, a dog's paw print, trades on a common local mispronunciation of the word 'Google' - which makes it sound similar to the Chinese for 'dog'.

But despite these parallels, Baidu's IPO in 2005 is not Google's IPO in 2004. To drive that point home, you only need to look at Baidu's last quarter revenue of about $8.5 million, compared to Google's $1.38 billion. To find such meager pickings in Google's financial history, you have to go all the way back to 2001, three years before Google's own IPO. And don't forget Baidu is generating this relatively puny cash flow despite being the most visited website in China and the fifth most popular in the world.

A key reason for this low income is that the average Chinese citizen doesn't have much money to spend. Baidu, like Google, relies on advertising to make money (in Baidu's case that's mainly in the form of paid links inserted at the top of search results, and indistinguishable from neutral results). In China, despite rapid economic growth, average disposable incomes are still very low, below $1500 annually, even for the wealthy urban residents. That compares to about US$30,000 in the US.

For obvious reasons, people with less spending money will tend to be less attractive targets for advertisers. Therefore the money a search company can receive for displaying online ads in China will be proportionately lower. In addition to this, credit cards, a key facilitator of online impulse buying, are rarely used in China. “E-commerce is still at a very early stage in China,” says Catherine Straathof, Senior Director, Investor Relations and Corporate Communications at Sohu, one of China's top web portals.

There's no doubt that China's economy is going to keep growing, and consumer spending power along with it. But it's not so clear who will benefit most in the country's Internet arena, the incumbents with local roots, or the foreign giants with deep pockets.

While Google's combination of simple user interface, uncannily accurate searching and unobtrusive adverts were unique five years ago, things are different now. Baidu has Google itself to compete with in China (not to mention Yahoo, MSN, and so on).

A recent survey of urban Internet users shows Baidu well ahead of Google in China's Internet search market (with other competitors trailing far behind). But these figures give a misleading impressing. For example, Baidu's usage figures are boosted by searches for pirated mp3s, says Shanghai-based analyst Jim Sun, of Evolution Securities. This does not look like a tenable long term business, and Baidu has already faced two lawsuits over the service.

Moreover, Google has considerably more high-income and highly-educated users than Baidu in China. This group holds a disproportionate share of wealth, is more likely to be able to buy items online with credit cards, is more likely to be within reach of product distribution networks, and is therefore worth much more to advertisers.

While Google has been held back by a lack of local connections, says Jim Sun, recent deals with local partners have changed that, and the company's China revenue is ready to take off. No doubt Google's poaching of Microsoft's China expert, Kai-Fu Lee could help there.

So who's China's Google? At the moment, it looks like it's Google.