Baidu to Provide Paid Search Ads to Microsoft’s China Sites

Microsoft said China-basedsearch engineBaidu.com will begin displaying paid search listings on the software giant’s Chinese Web sites this month.

Such Microsoft sites as MSN and Windows Live will display Baidu’s paid search listings, as will other partner sites in Microsoft’s network.

“Microsoft is committed to bringing innovative online services and software, including search services, to Chinese Internet users,” said Erik Johnson, the general manager of Microsoft Online Services Group in Greater China. “China is one of our most important markets, and the strategic alliance with Baidu will help us provide new opportunities for advertisers, which will further enhance our search business in China.”

Neither the financial terms nor the length of the agreement were disclosed.

Baidu is China’s largest search engine. From its fast-growing inception through its IPO (initial public offering), it has been compared favorably to Google, which — like many other U.S.-based companies — is eager to find a foothold in the Chinese marketplace.

Partnership Pattern

Shares of both companies’ stock moved higher by about a percentage point in morning trading Friday. Baidu rose to US$120.20 while Microsoft floated to $30.11.

Baidu has made partnering with American companies a major part of its overall strategy. In October,MTV struck a deal with Baidu to distribute music videos and some TV programs online in China.

The search company has also partnered witheBay’sEachNet, the auction giant’s Chinese arm, to create co-branded toolbars, payment solutions and other online features. That deal was an extension of an earlier agreement first signed in 2000. In April, Baidu said it would work with Intel’s China subsidiary to build new search technology for PCs, handsets and home entertainment products.

Baidu also recently raised eyebrows by saying it would attempt to expand into the Japanese market, a somewhat questionable move since it would mean diverting resources away from the far larger opportunity at home.

Linking with Microsoft gives Baidu another major partner, and it will help more Chinese Web users see its paid listings. It also gives Microsoft instant access to a working advertising sales force that it would otherwise have to build from the ground up.

“Baidu’s partnership with Microsoft recognizes the huge potential and rate of growth of the Chinese online search market,” said David Zhu, COO of Baidu. “We are delighted to share our rich business experience and channel resources with our partners and contribute to the overall development of the Chinese search market.”

The partnership comes less than six months after Google sold a 2.6 percent stake in Baidu that it had held since before the company went public in August of 2005. In selling the stake — the search giant said in a filing that it sold its stake for $60 million, netting more than $50 million in profit — Google said it wanted to devote more resources to developing its own China business.

Center of Attention

A few weeks ago, Piper Jaffray analyst Safa Rashtchy hinted that a deal between Baidu and Microsoft might be in the works. The deal would not be a blockbuster, he noted, since Microsoft is considered a relatively small player in China, despite its monthly draw of some 465 million visitors worldwide.

The partnership eliminates the need for Microsoft to develop its own paid search offerings in China, which would involve numerous regulatory and technological hurdles, Raschtchy explained. Microsoft’s AdCenter has rolled out in other markets, but it is still relatively new, and building a Chinese-language version platform is no easy task.

The deal could mean Baidu will be serving ads for 50 million more daily searches, possibly driving as much as $20 million per year in new revenue, Raschtchy estimated. Microsoft would likely see only a fraction of that revenue, he added. Still, with Google and others still not ready to launch their own services in China, Microsoft will at least have its foot in the door.

In essence, Microsoft is using Baidu as a shortcut into the Chinese paid search market, a gamble that could pay off if it can build up market share before Google and others. “China is obviously a huge market opportunity for all Web companies,” Greg Sterling, principal with Sterling Market Intelligence, told the E-Commerce Times.

Though official figures are hard to come by, iResearch estimates the Chinese Web search industry will reach about $452 million this year and just over $700 million in 2007. By comparison, paid search in the U.S. is a $6.9 billion market this year and will grow to nearly $9 billion next year.

“It’s all about the long term — and finding the next wave of growth after this current run starts to slow down,” Sterling said. “Ultimately, you just have more users in total in China — more Web users and, by extension, more mobile users as well.”