Google in China: Market Share Declines but Revenue Rises

When Google chose principle over profits in China, the expectation was that it would boost the company's credibility around the world and it would eventually be permitted to return anyway. So, loss of market share and some revenues and profits, but probably a clever strategic decision in the long run. As it turns out, revenues have increased despite the market share loss. However, Chinese competitor Baidu have picked up a lot of that market share. The question for the future is whether Baidu will consolidate its position, making Google a permanent second player there, while Baidu then uses its position in China to take on the rest of the world, just like Google did from the US. Observers suggest that this is what the Chinese policy makers had in mind all along as part of their 'indigenous innovation' campaign. Alexandra Stevenson comments in the Financial Times:

"Locking horns with the Chinese government has not been good for Google’s internet search business in China. Data released on Friday shows Google has lost market share to Baidu - its main competitor – for the fifth quarter in a row. The internet giant currently has 19.2 per cent share of the market, while Baidu has 75.8 per cent. That’ s a decline of 11.8 percentage points since the beginning of last year, when the search giant first announced its partial retreat from the mainland to Hong Kong.

But it’s not all bad news for Google. While it’s search engine numbers are declining, Google’s overall revenues from China are not.

Data from Analysys, a Beijing-based internet research firm, released on Friday reveals that other Chinese search engines have also gained some of the internet search market share over the last year: Sogou, and Tencent’s Soso both saw incremental gains in market share, 0.3 ( to 1 per cent) and 0.2 (to 0.6 per cent) percentage gains respectively.

While other Chinese companies are gaining a foothold, most of Google’s lost market share has gone to Baidu. In the fourth quarter of last year, Google saw its market share drop to below 20 per cent for the first time three years.

As analysts anticipated, the drop in market share has a lot to do with the fact that Google no longer has operations on the mainland, making its Google.cn search engine unreliable and inconsistent. In January of 2010 the company said it was no longer willing to its censor Chinese search engine, and in March Google announced it would move operations to Hong Kong.

“The destiny for Google is very dim in this regard [as a search engine] because their relationship with government is very bad, which will make them in lower hands with competition” Edward Yu, chairman and CEO of Analysys told beyondbrics.

But it’s not all bad news. While Google’s share of the internet search market is rapidly decreasing as fewer users go to its Google.cn site, “their revenue from an exact number perspective is climbing”, says Yu.

Prior to Google’s partial retreat to Hong Kong, the company had three main sources of revenue: companies looking to market their services outside China and who want to tap into Google’s Adwords service, websites who want to use Google’s display ad network called Google Adsense to monetise their web content, and its internet search engine.

Since its exit from China, Google has made a lot of effort to boost its display ad network, according to Yu, and Google is aggressively pursuing Chinese advertisers to get them to place ads on its network.

But like its business in internet search, Google is facing tough competition on the ad network front as well. Baidu runs a similar ad network service, as does Sina, and Alibaba through its Alimama subsidiary. Sina’s decision to drop Google’s search service and use its own search engine may have to do with the fact that display ads are becoming a major source of revenue for Sina.

It looks like Google will have to get used to sharing with the competition in China.