Baidu is one of the most known of the Chinese Internet giants. Some of the buzz is admiration for Robin Li, one of the pioneers of the Chinese Web scene who built a global giant that succeeded in a political environment where Google cried “uncle.” Others have painted Baidu as the mirror image of Google’s lofty “do no evil” credo.

So on our recent trip to Beijing, we decided to take our cameras to the search giant’s massive headquarters– which spans more than one million square feet– to see if we could find any torture chambers. Big thanks to our gracious host and good sport, Baidu spokesperson Kaiser Kuo.

Chinese search engine Baidu posted strong earnings today, with total revenue in the third quarter of 2011 coming in at $654.7 million, an 85.1% increase from the same period in 2010. Baidu’s net income was up 80% to $295 million. Diluted earnings for the third quarter of 2011 were $0.84; non-GAAP earnings were for the $0.86. Baidu beat Wall Street expectations; analysts expected a profit of $0.83.

Robin Li, chairman and chief executive officer of Baidu said in a release, “Baidu recorded stellar results in the third quarter driven by rapid growth in customer spending and user traffic. In particular, spending by large customers significantly outperformed our expectations as we continued to build strong relationships with high quality companies. China’s search industry is still in its early stages, and as the clear industry leader we see enormous room for continuing growth as users and online marketing customers become increasingly sophisticated.”

Operating profit in the third quarter of 2011 was $349.1 million, an 88.5% increase from the corresponding period in 2010. Online marketing revenues for the third quarter of 2011 were $654.4 million, representing an 85.1% increase from the corresponding period in 2010.

Baidu had approximately 304,000 active online marketing customers in the third quarter of 2011, representing an 11.8% increase from 2010 and a 2% increase from the previous quarter. Revenue per online marketing customer for the third quarter was approximately $2,148, a 65.1% increase from 2010 and a 19.1% increase from the previous quarter.

As of September 30, 2011, Baidu had cash, cash equivalents and short-term investments of $1.8 billion.

During the quarter, Baidu closed its $306 investment in Chinese travel site Qunar. Baidu now has 77 percent of the search market share in China.

Hot on the heels of Baidu’s new mobile OS launch, reports are circulating that the Chinese search giant is partnering with Dell to build tablets and mobile phones.

China is a goldmine in terms of potential consumers. With over 900 million mobile subscribers, China is becoming one of the fastest growing tablet markets, as well. As the Google of the Eastern world, Baidu should have no problem marketing hardware under its brand name. And Dell’s business in China seems to have picked up as well, though the name carries far less weight with consumers than Baidu’s.

According to an analyst who spoke with Reuters, Dell may be “grasping at straws” in an attempt to breathe life into its tablet business. The Dell Streak 5 tablet has been discontinued in the States, but a Dell spokesperson said that the company “has a partnership with Baidu [and] the Streak 5 tablet, so the partnership will be in that space.” It’s not clear whether that means we should expect a Chinese version of the Dell Streak 5 or just another similar minitab.

Either way, Dell and Baidu will face some strong competition in China. Lenovo has seen great success in the Chinese market over the past few years, and Apple has an almost terrifyingly strong presence there. We’ve heard of girls giving up their virginity for an iPhone 4 and a Chinese teenager selling his kidney for an iPad 2.

With brand dedication like that it may be more difficult than expected to rip people away from their beloved Apple. And the companies won’t have much time to do so, either. Though neither company gave a solid timeline, a spokesperson said we may see the partnership’s first offering in as early as November.

Chinese search giant Baidu is reportedly developing a cloud-based smartphone platform in attempt to dip its toes into the mobile pool. Mobile internet users in China totaled 233 million in 2010, projected to reach 957 million by 2014. For some perspective, the total population of both the European Union and the United States was approximately 800 million last year. So in China, mobile is less of a pool and more of a vast ocean.

This should be interesting.

The company is calling its platform Baidu Yi, which translates to “Easy.” Similar to the Bing integration in Mango, this OS is all about search. Smartphones that run Yi will load up a search box within seconds of turning on the phone. Other components will load in the background, but users will be able to perform a web search almost instantly. The system will also offer up to 180 GB of cloud storage space. Sounds nice — but so did webOS. Will Baidu Yi fare better?

Baidu isn’t the only Chinese company looking to get in on the OS game. Local players like Hangzhou-based Alibaba and Shenzhen-based Huawei have announced similar cloud-based platforms recently, but as far as local competition is concerned, Baidu seems unfazed. “To us, cloud computing is much more natural than to an e-commerce company or a telecom equipment maker because we have the capability to handle data, just as Google has, that’s why they’re so good at it,” said Baidu VP Wang Jing to the Financial Times.

Baidu certainly has taken a page out of the Google playbook. But just one. The current version of Yi is based on Android, but the Android you’d see in China isn’t our Android. In most cases (not Baidu’s), it’s called Ophone, a fork of Android, and it effectively removes Google from the picture. The core Android operating system is made up of a Linux kernel, licensed under GPL, with Apache middleware and user stacks. Major components of the upper layers, such as the Android Market, are Google’s to license. Chinese carriers gladly do without those core Google software products and opt to integrate their own or third-party replacements.

In other words, Android’s success in China is a bit hollow, even if it is the basis for Ophone, and now Baidu Yi. What’s more, Mr. Wang mentioned that “it is possible that we [will] launch our own operating system in the future.” Google already has big problems in China, and Android getting left behind entirely (rather than marginally) by its biggest Chinese competitor would only make things worse.

But how does Mr. Wang feel about our other hometown hero — Apple. The company has already tapped China Unicom’s 184M subscribers, and reportedly has plans to launch the iPhone with China Mobile, which has a user base topping 930M as of August 29. Apple only has four (non-fake) Apple stores in the country, but China is its fastest growing market in terms of sales. With those stats, it hardly seems as though Baidu Yi poses a threat.

But nothing is ever as it seems. China is both an irresistible and incredibly dangerous market for American tech companies, and Apple faces a number of obstacles within the market. For one, the Chinese government requires special wireless internet technology (TD-SCDMA) on its mobile phones. And then there’s the massive black/grey market in China for iPhones and iPads.

Baidu’s co-founder and CEO seemed to know back in March that Apple would be one of its main competitors in the mobile space. In an interview with the Financial Times, Mr. Li made mention of the new OS as compared to iOS.

“Right now when you power on an iPhone, it takes 45 seconds before you can do anything,” he said. “In the future, one second, you turn on the device, and you can start using the box. That’s our mission for the future of the internet.” His plan is to build an OS that uses search as the basis for everything. “The goal is to let people become increasingly dependent on the Baidu Box.”

And that’s all we really need: to be even more dependent on our smartphones. Good work, Baidu.

Update: So it would seem that Baidu Yi has gone live. The OS features include an eBooks app called Yue, a Google-places style app called Shen Bian, Baidu-powered maps, and a music app called Ting. Check out the video after the jump to see Baidu Yi in action.

[Image credit: The Register]

[Video credit: MicGadget]

Chinese search giant Baidu’s investment in Qunar officially closed  this week, and the two teams are working on integrating Qunar’s search results into Baidu’s travel vertical now. I caught up with Qunar’s CEO Chenchao Zhuang for his first Western interview about the deal to talk about what the deal means for the company and China’s Web scene broadly.

This $306 million deal is not only a big one in dollar amount, but it could represent a seminal turning point in the Chinese Web. Until now, Chinese Web companies have had a strong bias towards going it alone. Much like earlier eras in Silicon Valley, success is considered to be an IPO not an acquisition. But there’s a lot of pressure on that to change, and most industry watchers feel it’s just a matter of time– and of course, price.

For one thing, the Chinese Web is so crowded, and the haves and have nots are incredibly lopsided. Distribution is becoming an expensive challenge and tie ups with companies like Baidu or Tencent can represent massive synergies and upsides for good, profitable Web companies having a hard time breaking out into the mass market.

And the heady prices of some of the Chinese giants will put pressure on the companies to show new areas for growth, something that gets harder and harder for these companies by the simple law of large numbers. Meanwhile those big Chinese Web giants just have staggering amounts of cash. Investor pressure is going to mount to do something with it, and as the markets stay volatile for Chinese Internet IPOs, those deals are going to start to look more attractive….at some point.

Qunar is taking a step half-way in that direction by taking the investment from Baidu, and Zhuang expects more companies could start following its playbook.

Qunar is by all accounts doing well: It’s been profitable since last year, its growth is at least doubling every year, and it is still on the IPO track. It’s raised just $27 million over six years and only spent $6 million of that, focusing on profits and revenues from the beginning like many Chinese Web companies.

But online travel is still a niche market in China. A deeper look at the market shows why calling Ctrip the “Expedia of China” or Qunar “the Kayak of China” is an inherently flawed analogy. It also shows why Qunar needs the power of Baidu’s distribution more than it really needs Baidu’s cash.

Only 8% of people book travel online, versus 35%-50% in the US, depending on what category of travel we’re talking about. And unlike the early days of online travel agencies in the US where an oligarchy of sites divvied up the market, Ctrip consumes the bulk of China’s online travel pie. What’s more: Ctrip isn’t really a great analog to Expedia or Travelocity because 70% of its business goes through call centers; only 30% of its business is truly booked online.

Qunar started out in 2005 to be the “Kayak of China,” but has substantially changed its model, because the online inventory just isn’t there yet in China the way it is in the US. “The airlines just started their online initiatives recently and the percentage is still low,” he says. “Most hotels do not have a central reservation system yet. There is no legacy system the way there was in the US.”

Not only did Qunar have to painstakingly build its own complex database of deals, routes and prices, but one of Qunar’s main businesses is giving hotels and airlines a software-as-a-service booking engine so that they’ll actually have the kind of results to aggregate and search that Kayak was able to take for granted. “It’s painful, but it gives us a more and more unique barrier to other entrants,” Zhuang says.

The flipside to the pain is a massive greenfield opportunity to build better travel engines and consumer experiences from the ground up in China. When modern Internet companies are the ones giving hotels and airlines the reservation engines, they’re likely easier to connect with online systems. “Sometimes being behind is a good thing. We have no legacy systems and we can do everything from scratch,” Zhuang says.

But calling Qunar an OpenTable for travel isn’t quite right either because it doesn’t charge for the software. It doesn’t make money off of transactions fees either.  Eighty percent of its revenues come from pay-per-click ads, and another 15% comes from display ads. This may be the biggest distinction from other online travel players: Essentially Qunar is a media company, not an ecommerce or software company at all. Like TripAdvisor, it has aggregated thousands of consumer reviews to help consumers make decisions. The company makes money off of advertising against that content and its search results.

Given that, the deal with Baidu makes a bit more sense to Western eyes. There’s no media company on earth that can’t benefit from a torrent of eyeballs from a major portal. (Even a laggard. Just ask TechCrunch, post AOL deal.) No doubt startups in the same profitable-but-needs-more-distribution phase will be watching this partnership closely to see if those always promised synergies are actually there.

Founded in 2005, Qunar is basically the Kayak for China. The portal allows Chinese consumers to serach for air and rail tickets, hotels, and tour packages. The company also provides group-buying deals and user discussion forums for reviews. Currently Qunar is one of the most frequented travel search engines in China, listing more than 11,000 air routes and 102,000 hotels worldwide.

This is a strategic investment and partnership, as Baidu says that Qunar and the search engine will ‘cooperate in certain areas of online travel search.’

There’s no doubt that online travel in China represents a huge potential market for both search engines and travel companies and Baidu isn’t the only one who is making investments. Tencent and Expedia just made a $126 million investment in Chinese travel site eLong.

That lazy marketing strategy has helped companies like YouKu (aka THE YOUTUBE OF CHINA!….nevermind it doesn’t really do user generated content) or RenRen (aka THE FACEBOOK OF CHINA!) to get heady IPO pops, but it doesn’t help investors have a clue what they are really buying or the context of those companies on the ground. Historically boutique banks are better at doing this than the bulge bracket firms. (See the “four horsemen“ who helped build Silicon Valley.)

Pacific Crest has been in China for ten years, and it’s clearly a good time for the firm to be doubling down. Much of the entrepreneurship in China over the last decade has been in non-tech sectors. Think: The guy who became a billionaire by growing the potatoes KFC uses in its fries. (I have no proof that guy actually exists, but I always hear about him when I’m talking to bankers in China as the example that nearly anything becomes a $1 billion business on the mainland.)

But tech is finally exploding, and China is proving that the biggest Web companies no longer come out of Silicon Valley. Not only are Tencent and Baidu two of the five largest Web companies by market cap in the world, the number of $1 billion+ Web companies in China has doubled in the last two years from fifty to more than 100, says Scott Sandbo, Chairman and CEO of Pacific Crest.

And my personal barometer for Chinese investment no longer being a fringe thing: Even Michael “everything great happens in the Valley” Arrington has money invested there.

Of course as the rollercoaster of RenRen’s IPO shows, many people are momentum investing off of scant information, marketing taglines and momentum. That’s not pretty. Hopefully, Pacific Crest can bring some more solid research to the Chinese tech investment landscape, before this whole thing ends in paper millionaires moving back in with their parents….again.

A Global Mobile Internet Conference kicked off last night in Beijing. The opening event was an on-stage interview by Barrett Parkman with John Liu, head of Google’s China operations, followed by a panel discussion with several entrepreneurs and executives from MSN and Zynga.

The interview was titled “How foreign companies can succeed in China”, a rather amusing title considering that no foreign Internet company has ever achieved a dominant position in the People’s Republic. Cynics in the audience joked that after Google’s famous partial withdrawal from China, John Liu’s presentation should perhaps been called “How foreign companies can fail in China” and name checked eBay, Yahoo and MSN as foreign companies whose performance in this market can best be described as mediocre.

Liu’s interview and most of the panel discussion was all vanilla until Groupon was mentioned.

Panelists Alvin Wang Graylin (CEO of mobile search provider Minfo) and Dominic Penaloza (CEO of Ushi, a LinkedIn clone) talked about the high numbers of non Chinese speaking foreigners who are running Groupon’s China operations – a classic mistake made by foreign companies in any industry in China. Kaiser Kuo (head of international communications for Chinese search giant Baidu) mentioned Groupon’s famous Superbowl commercial which managed to enrage both the free Tibet crowd and Chinese nationalists in the same week Groupon launched in China, and the sudden departure of their China sales director after a few weeks on the job, which everyone in China tech circles knew about immediately because he publicized on his Weibo (Sina.com’s popular Twitter-like service).

The only nice thing anyone had to say about Groupon was that they have just succeeded in purchasing the domain name Groupon.cn from one of the thousand-plus Groupon clones that are already operating in China.

Kuo crisply summed up the prevailing sentiment: “Groupon is getting it in the ass”.

Update: Kuo emailed me the following correction:

I don’t think I actually said “getting it in the ass” in that context; I think I used the phrase talking about how there’s lots of people with wise advice on how not to get it in the ass in China, but that Groupon seems to have ignored it all.

Update 2:

Kai Lukoff of Techrice recorded the discussion and provided this transcript of Kuo’s remarks:

They seem to have done everything ass backwards. This is a business that is built on selling to locals and yet their head of national sales is a foreigner, doesn’t speak particularly good Chinese. I’m not convinced this isn’t just window dressing for an IPO–I am not absolutely convinced that they are serious about playing in this market. They seem to have ignored the accumulated wisdom of many years of non-Chinese companies coming in and completely getting it in the ass.

I still stand by the headline of this post.

Facebook, as I’m sure you know, is blocked in China.

And being banned in a country that boasts roughly 500,000,000 Internet users is, of course, not exactly an ideal situation for a company aggressively looking for growth worldwide.

Now Facebook is rumored to have recently inked a partnership deal with a Chinese Internet giant in a move to enter the country (which, as some have pointed out, won’t be a walk in the park any way you look at it).

The rumors originate from a message posted on Sina Weibo, a Chinese Twitter-type micro-sharing service, by Hu Yanping, a director of the Data Center of China Internet, a respected Internet business analyst and former journalist.

Thomas Crampton translates his message, posted a few hours ago, thusly:

“Facebook really is about to enter China, the agreement is signed. A domestic website will work with Facebook to create a new site. This new site is not interlinked with Facebook.com. Will this live or die in China?”

At the end of last year, Facebook founder and CEO Mark Zuckerberg traveled to China, quite visibly. Though labeled as a personal vacation, he met with a bunch of interesting business people there, including Robin Li, the billionaire co-founder of Baidu, China Mobile CEO Wang Jianzhou, Sina.com CEO Charles Chao and the head of Alibaba Group, Jack Ma.

The Wall Street Journal noted at the time:

The trip appeared to be an effort by the 26-year-old to learn more about the Chinese market, rather than discuss any specific business proposals. But it came as the Facebook founder openly has discussed a desire to get into China, where the government has blocked access to the site since last year.

At an earlier talk to aspiring entrepreneurs at Y Combinator’s Startup School, Zuckerberg indeed expressed hopes to figure out the “right partnerships that we would need to do in China to succeed on our terms.”

“Before we do anything there, I’m personally spending a lot of time studying it and figuring out what I think the right thing to do is,” he said, according to the WSJ. “It’s such an important part of the world. How can you connect the world if you leave out 1.6 billion people?”.

So which partnership, exactly, has been signed, at least according to YanPing? If the rumors check out, Facebook likely reached an agreement with Sina, the largest Chinese-language infotainment web portal, or Baidu, the Chinese search engine juggernaut, or perhaps both.

Establishing a partnership with a local Internet giant would be the right way for Facebook to enter China in a way that appeases its restrictive government.

It’s also worth noting Facebook would still have to compete against the likes of Tencent’s PengYou and QZone, 51.com and RenRen and Kaixin001. Coincidentally, the latter is rumored to shoot for an IPO in the United States, the WSJ reported this morning.

We’ve contacted Facebook for comment and will update when we hear back.

For your further reading pleasure:

TC: Chinese Social Networks ‘Virtually’ Out-Earn Facebook And MySpace (April 2009)
TC: When Will China’s Internet Giants Open the Acquisition Wallet? (December 2010)

Forbes: Facebook Should Be In China, Says Baidu (December 20, 2010)
TechRice: Why Zuckerberg Came to China and Why Facebook Will Not (Dec 27, 2010)
Forbes: Will Facebook Follow Zuckerberg To China? Inevitably (December 28, 2010)
Fast Company: The Facebooks of China (January 12, 2011)
Bloomberg BusinessWeek: China’s Facebook Syndrome (March 10, 2011)
PCWorld: Twitter Won’t Be Able to Ignore China, Co-founder Says (March 24, 2011)

Leading Chinese search engine company Baidu has led a $50 million financing round for Anjuke, a major real estate marketplace in China. Anjuke, which was founded in Shanghai in 2007, provides a platform that connects property buyers, homeowners and real estate agents to buy and sell secondhand properties online.

Anjuke last year also launched Haozu.com and Aifang.com to expand to property rental and new property sales, respectively.

The company currently boasts over 800 employees in 20 offices, and offers its service in 20 Chinese cities. Anjuke in a press statement says it will use the additional capital to invest in geographic expansion and R&D.

Matrix Partners China, which is affiliated with U.S.-based venture capital firm Matrix Partners, also participated in the round. Anjuke has raised $72 million to date.

But part of this is cultural. American Internet entrepreneurs are more likely to want to sell their companies these days. But in China, it’s like the late 1990s: Success equals an IPO. On the other side of the bargaining table, American companies like to buy technology, engineers and potential competitors and aren’t afraid to potentially overpay to get what they want. Chinese Internet companies have the cash and the stock currency: Tencent is the third largest Internet company in the world by market cap and Baidu is the fifth. But so far, they’ve been loathe to do big acquisitions that would dilute the corporate culture.

That has to change at some point… doesn’t it? We ask DCM’s Ruby Lu about the implications of this IPO-only culture, especially the talent war it’s creating among big companies and startups in China’s hotspots. Video below.

One of the most interesting corners of that goldrush is online video. Between dozens of competitors, soaring bandwidth costs, piracy issues and government crackdowns, this has been one of the harder areas for Chinese upstarts to succeed and more than a dozen have died. A lot of Silicon Valley money has died with them. But left standing are YouKu and Tudou and both have filed paperwork to go public.

They are frequently called the “YouTubes of China,” but both are actually becoming the home of more premium and even original scripted content. These companies may have started with a user generated content bent but are more like a Hulu than a YouTube now, or even an HBO or AMC. It seems UGC is hard to monetize everywhere.

With hundreds of millions of uniques per month– they are sucking up insane amounts of bandwidth. The two leading companies Tudou and YouKu have raised more than $300 million between them and only Tudou is close to profitable. Some IPO cash would help them dramatically, as would the marketing event that goes along with a successful IPO.

But with two companies with roughly the same user base and roughly the same revenues both getting ready to file– which one should investors buy? Bishop helps us make sense of the market.

This might be one of the many data points supporting why the Baidu stock has more than doubled since January, now at a market cap of 40 billion. That is roughly the size of eBay’s.

“We have a lot of room for growth,” Li said, as 1/3 of China currently has Internet access which boils down to about 420 million people. According to Li 99% of those people use Baidu as their search engine and that number can more than double with growing popularity of mobile phones.

So why Google was not as successful in China? “China is a very different market and Google was not close enough to feel the market.” Li also blames Silicon Valley. The proliferation of VC money poured into the local search market was one of the reasons Google failed to reach market share. Before it redirected its Chinese site to Google Hong Kong, that is.

Interestingly enough, Li himself said he thought about moving Baidu to Hong Kong a year after starting Baidu because of Chinese censorship. Li’s decision to stay has been somewhat vindicated by the fact that Baidu’s revenue has grown by 30 times over the last 5 yrs.

Li also does not regret having turned down offers in the $1.5 to $2 billion range from Google, Yahoo and Microsoft. “I knew Baidu had more potential than 1-2 billion,” Li said.

Under the deal, Rakuten holds 51% of Lekutian, with Baidu owning the rest. Much like Rakuten’s Ichiba market place in Japan (see here for our extensive case study on Rakuten), Lekutian is a B2B2C platform. Chinese merchants can set up an online shop in the online mall to sell directly to end consumers or source products from suppliers.

Lekutian monetizes through collecting “virtual real estate fees” as well as commission payments from shop owners. The platform started with some 2,000 merchants in beta today, instantly making it the biggest B2B2C platform in China, according to Rakuten.

In Japan, Rakuten dominates the e-commerce market with its gigantic Rakuten Ichiba online mall, currently counting 33,000 merchants and no less than 64 million members (which is half of Japan’s population). The Baidu deal in January was the first of a series of international deals the company inked in recent months. Rakuten acquired US-based Buy.com for US$250 in May and France’s Priceminister for the same sum just one month later.

The launch of Lekutian follows another cross-border joint venture in the e-commerce sector between a Chinese and a Japanese company: Taobao and Yahoo Japan linked their online shopping services back in June this year.

[crunchbase url="http://www.crunchbase.com/company/rakuten" name="Rakuten"]

[crunchbase url="http://www.crunchbase.com/company/baidu" name="Baidu"]

Editor’s note: This is a guest post penned by Michael Cole, Managing Director of RightSite.asia, China’s largest online marketplace for commercial and industrial real estate. Cole has also successfully launched, grown and profitably exited from media ventures in China.

After a modest amount of time observing China’s economy it becomes clear that the government likes to arrange organized competition in industries it considers strategic. Thus the country gets three major airlines—China Eastern, China Southern and Air China—as well as three major mobile phone networks in China Mobile, China Unicom and China Telecom.

Now, with the recent announcement of two major new search engine companies, it appears that search is joining transportation, phone networks and Internet service providers as a strategic industry to be managed more directly by the government. And maybe China will soon have three search giants to match up with its telephone and airline triplets.

The first search engine deal announced two weeks ago was an alliance between ecommerce giant Alibaba and online portal Sohu to upgrade Sohu’s existing search product, Sogou.com. In a statement on Monday, August 9th, Sohu announced that Alibaba and Yunfeng, an investment fund cofounded by Alibaba’s chairman, Jack Ma, would be buying 16 percent of Sogou.

Another 16 percent of the company would be invested by a fund affiliated with Sohu chaiman Charles Zhang. And Sogou could use the help. In a search market dominated by Baidu with a 70% share, and Google with 24.2%, Sogou currently ranks third, but has only 0.8% market share according to recent market research by third party analysts.

The second, and more surprising deal was a link-up announced two Fridays ago between Xinhua and China Mobile to start yet another search engine. Xinhua, a news agency belonging to the central government which also acts as a propaganda organ and sometimes intelligence gathering body, and China’s largest cellular carrier seem like unusual partners for an Internet venture, and the exact terms of the transaction have yet to be announced.

The New York Times described the deal as follows:

In an apparent bid to extend its control over the Internet and cash in on the rapid growth of mobile devices, China plans to create a government-controlled search engine.

While these two new search engine ventures being announced in a single week, particularly so closely following the recent Google controversy, could be a coincidence, very few major transactions in an economy that is still largely government-controlled happen in such a random way.

Although Baidu, Sohu and Alibaba are all private companies, and thus very different creatures from state-owned enterprises such as China Mobile or the airlines, in practice China’s government requires any large media enterprise to be closely aligned with the bureaucracy and these major firms often serve as unofficial market champions for the nation, particularly once they have gone public and become internationally recognizable symbols of the country’s media markets.

At the same time, the government is careful not to have any market dominated too much by a single company and it actively works to encourage (and organize) some competition among industry heavyweights. Thus the airline industry was split into three companies from a single parent, and part of the 3G market was set aside for the lesser cell phone players, China Unicom and China Telecom.

Now a similar scenario seems to be appearing in search and it most likely means that the government is taking search engines seriously as a strategic national interest. (Bad news if you are Google). In a story that Xinhua published regarding its new joint venture with China Mobile, the news agency portrayed its search engine enterprise in a directly political manner.

According to the report, the new search engine is intended to “better serve the work of the Party and the nation and to practically protect national interests … and to expand the reach and the ability in and outside China of the country’s mainstream media to guide public opinion.”

While that mission statement would seem to doom the new search product with consumers, the massive market penetration of China Mobile could give the new project a significant advantage with mobile users.

While it is too early to tell what will happen in China’s search market, if the moves last week were officially sanctioned measures to “harmonize” the market, there could be some moves in the pipeline to curb Baidu’s dominance and provide a boost to the new players. This could take the form of reserving parts of newly developing markets for the newcomers or through other measures designed to keep a perceived competitive balance in the market.

The other side of this equation is that if this recognition of search as a strategic industry is happening as speculated here, then opportunities for Google or other international companies to achieve gains in the market are likely to all but disappear.

While China welcomes foreign investment in most industries, it is still ambivalent about international involvement in the media sector, particularly with regard to consumer-facing products. Anything which smacks of mass media is likely to be all but closed off to foreign involvement, and search, with its ability to lead users to new information may be seen as too strategic to be left to the open market.

But I underestimated one big thing: The impact that the lack of Google would have on China’s Web businesses. By essentially handing Baidu a short-term monopoly on keywords, user acquisition costs have gone through the roof, infuriating many of the people who were originally sympathetic to Google’s case just a few months ago. “They should have just not come into the market to begin with if this is how they were going to act”: if I heard that statement once in the last two weeks I spent in China, I heard it a dozen times.

This wasn’t all Google’s fault. Frankly put, the company didn’t have enough market share to wreck things on its own. But it was icing on the cake of an increasingly unsustainable situation. Market forces—ie, so much venture capital backing so many new Chinese Web ventures—were already making the cost of acquiring traffic through popular online channels in China expensive. (For instance, there are said to be literally hundreds of Groupon-clones in China vying for traffic all of the sudden.) Now, sources say prices are almost totally out of reach for anyone but the most well-funded companies.

Marc van der Chijs co-founder of Tudou and CEO SpilGamesAsia told me a year ago buying traffic via keywords and listings in directory sites like Baidu-owned Hao123.com was a no-brainer. But he says within the last year, the prices have gone up as much as 10-fold. So high, van der Chijs finally walked away, glad he grabbed some users while they were affordable.

He’s not alone. I talked to about a dozen startups who said they are spending the bunk of their money these days on user acquisition. It’s creating some concern that newer, scrappier ventures are locked out of a market increasingly dominated by Web giants like Sina and Tencent.

The desktop directories at a Chinese Internet cafe show a similar picture. They are hopelessly crowded with hundreds of games and entertainment sites. (See the screenshot I took at a cafe in Xi’an to the right. It’s a small sample of the offerings jumping out at you as soon as you log on.) One of the newer online gaming success stories of China, Giant Interactive, caught everyone off-guard back in 2006 by using a veritable army of thousands of hip kids to travel around to Internet cafes like this one and talk up its game, offering specials and teaching people to play, side-by-side. Giant went public on the New York Stock Exchange in late-2007 largely off the success of that one game, ZT Online.

But even such extreme measures are a challenge now, since increasingly the Chinese Web is spreading beyond Internet cafes. “That’s why so many companies are trying to have a social media element, so people will invite their friends and we can get more users for free,” says Song Li, the founder of a few online ventures including online dating site Zhenai and location-based microblog Digu. Indeed, that’s a big reason Giant invested heavily in social network 51.com, said Giant’s CFO Eric He in Shanghai last week. (Valley-based Redpoint Venture is also an investor in 51.com.)

This is the first we’re seeing of Chinese sites having this much trouble finding eyeballs, and it’s a sign of maturity in the development of the Chinese Web. These days there are enough good services, content sites, games and social networks that a lot of people’s basic Web needs are being met. As a result, the audience is becoming sophisticated and harder to lure.

The problem is scale. When the US went through this problem, it was around the early 2000s. We had a lull in new sites being created thanks to the dot com crash and around 150 million people were online. In China, there are dozens of new sites being created per day and the Web audience is surging past 400 million users. (At least that’s the number being bandied around these days. The claims for the number of people online in China seems as ever-inflating as the price of a Baidu keyword) It’s a chaotic landscape of constantly shifting sands—even when you don’t consider concerns about changing government regulations.

Some entrepreneurs are getting creative. For Zhenai, Li is starting to experiment with television for the first time, both traditional ads and what he refers to as “product placement.” TV dating shows are all the rage in China these days, and they follow a specific script. A stage full of girls question and critique a would-be suitor saying things like “If you don’t drive a BMW, don’t even think about.” As I understand it, the girls take themselves out of the running, round-after-round by turning off their lights. At the end, the poor guy finally gets to a make a choice out of the ones still illuminated.

Shows like these have concerned a lot of older Chinese citizens about the lack of morals among the youth who seem obsessed with money, sex and things, but Li sees something more subtle at work here. Shows like these are an outlet for a wave of women who came into the work force as China was opening up its economy. Even at young ages they are educated and economically self-sufficient, so they’ve decided not to settle for a man for the sake of security. This group had been teased in society and called “The Left Behinds.” These game shows are a way of reclaiming their independence, their choice not to marry. And other women like them are living vicariously. There are about a dozen iterations of these shows showing throughout China’s fragmented TV networks.

Dating sites like Zhenai see opportunity here. Increasingly, these sites are helping with the casting and when girls from a given site gets picked, the site is listed under her name, like a product placement ad. Hopefully, if she’s alluring enough, that drives more would-be daters to the site. But setting up casting calls and culling through millions of members is a lot of work to find a telegenic few.

Is it worth all that work for the traffic? Even Li isn’t sure. But give him credit for trying. The Chinese Web became lucrative because of entrepreneurs who excelled in distribution and monetization. These guys can do better than continuing to buy inflated keywords. They have to– all inflated markets pop at some point. The companies that have found a more lasting way to build their audiences will likely be the ones who build the second generation of Chinese Web giants.

In the earnings release, Baidu’s chairman and CEO Robin Li also stated that new internet advertising product Phoenix Nest’s performance “continued to exceed” expectations. Baidu likely saw a flux in revenue from the product as it just replaced Baidu Bidding rank in December. Baidu was expected to see gains thanks to stronger paid search revenue as Google’s censorship issues with China escalated. Google shut down its Chinese search engine in late March in response to the widely reported cyber attack on Google in December 2009.

And since Google’s decision to shift products away from China, Baidu’s stock has soared. Of course, Baidu has always had a strong position in China. Baidu already had double its market share in China even before Mountain View publicly disclosed its plans to possibly shutter its Chinese operations, and Baidu is now operating the third largest search engine in the world.

Baidu also recently co-invested $50 million in a giant online shopping mall, and raised another $50 million for its new online video endeavor in China, so it’s poised for growth in other areas than search.

Google, in case you haven’t heard, shut down its Chinese search engine two days ago in response to the widely reported cyber attack on Google in December 2009.

Baidu’s stock price jumped yesterday too, after investment firm Kaufman Brothers upgraded shares from hold to buy and raised its price target to $690 on expectations for the Chinese company to pick up the market share in their home country that Google will probably lose.

When you look at Baidu’s stock performance over the last 3 months, the jump is even more notable: its lowest price point this year was $386.5 (on 12 January 2010) while recent trading puts the value at no less than $606 per share. That’s more than triple the stock registered a year ago, and it puts Baidu’s current market capitalization at about $21.1 billion.

For the sake of comparison: that’s close to Yahoo’s market cap ($22.5 billion) but a far cry from Google’s ($172 billion).

Earlier this year, Baidu reported blow-out financial results for the fourth quarter of 2009: the company’s Q4 profit rose 48.2% to 427.9 million yuan (approx. $62.7 million), or $1.80 a share.

The recent surge in shares can not be 100% attributed to Google’s withdrawal from China, however: Baidu already had double its market share in China even before Mountain View publicly disclosed its plans to possibly shutter its Chinese operations, and Baidu is now operating the third largest search engine in the world. Baidu also recently co-invested $50 million in a giant online shopping mall, and raised another $50 million for its new online video endeavor in China, so it’s poised for growth in other areas than search.

Still, Baidu is clearly benefiting as Google backs away from China.

Hulu investor Providence Equity Partners is pumping $50 million into a new online video company set up by Chinese Internet search giant Baidu.

The news comes roughly 7 weeks after Baidu confirmed plans to established a new independent company to provide licensed, advertising-supported online video content to Chinese Internet users.

Although it isn’t yet explicitly confirming that the name of the new company will be Qiyi in the press release about the investment, Baidu says it has registered the domain name qiyi.com for the venture.

Reuters broke the news about a possible forthcoming investment by Providence Equity Partners in the new venture on January 5, citing local news sources who reported that the new joint venture company had received about $60 million in private equity funds, with Baidu investing about $10 million into the firm.

If those reports were accurate, that means Qiyi only has Baidu and Providence as its backers for now. Baidu has also said that it will continue to maintain majority ownership in Qiyi.

According to eMarketer, China will have 518 million Internet users in 2010. The size of the country’s online video market was approximately 162 million yuan ($23.73 million) in Q3 2009, according to data from research firm Analysys International, and analysts expect sales to triple in the coming years.

Update: more context on the space is available here (via comments).

Baidu stresses that it will work with regulators to ensure the “lawful distribution” of professionally produced media and entertainment content on the Internet.

From the About page:

Qiyi (www.qiyi.com) is an independent operated video website created by the world’s largest Chinese search engine Baidu Inc(BIDU.O). Qiyi intends to be a high-definition online video platform, offering the latest, the most complete, and most professional high-quality licensed content to users for free.

Under the premise of orientating correct public opinions and strictly executing the government policy and regulation, Qiyi provides diversified licensed video content and launches various channels for hit TV shows, movies, documentaries, cartoons, music, variety shows, etc., to fulfill the increasing needs from the users and to enriches customers’ cultural life.

According to the customer-oriented principle of Baidu, Qiyi aspires to reach the highest satisfaction of customers, and strives for perfection of exclusive content, reasonable products and viewing experience.

Meanwhile, Qiyi will strictly abide by copyright laws and administrative regulations, to take copyright protection measures to protect the legitimate rights and interests of copyright holders. Qiyi copyright of all content through legitimate channels such as procurement obtained.

Qiyi adopts meanwhile a series of measures to protect the legal rights of content providers and follows strictly the copyright-related laws and regulations. All videos on Qiyi are from legal channels.

Qiyi makes profit from advertisers on the websites and will also committed to developing other profit models supported by both of the users and the advertisers. The licensed online videos are totally free for internet users.

Qiyi keeps making efforts in the future operations to be the favorite video viewing platform of Chinese internet users’, and meanwhile to spread the advanced socialism culture by undertaking its social responsibility as an outstanding corporate citizen. Qiyi is playing a positive role in developing a harmonious society.

It’s just like Hulu, only with governmental censorship!

(Via press release)

In the wake of Google’s stand against censorship of its search engine in China and its consideration to cease business operations in the country altogether, Baidu – to Wall Street’s surprise – raised its sales forecasts for the first quarter of 2010, projecting total revenues ranging from $176 million to $181 million, representing a 48% to 52% year-over-year increase.

In other words, Baidu expects to benefit directly from Google’s possible exit from China, although that dispute is far from resolved at this point.

Baidu has performed better than other Chinese Internet stocks this year on expectations that the company will gain sales from Google’s customers in China, the world’s largest Web market with an estimated 380 million users (according to eMarketer).

The Beijing-based firm holds about 64% of the country’s search market share, well ahead of Google.cn, which holds approximately 31%. Google stands to lose a large chunk of that share if it ends up exiting the Chinese market, which is not a made decision yet. The Mountain View, California company threatened to leave China after being hit with cyber attacks that originated from the country.

The reported financial results and the raised forecasts sent Baidu’s shares up 8.68% at $473 in after-hours trading. Clearly, investors don’t care much about the decision of both Baidu’s CTO and COO to quit the company for ‘personal reasons’ earlier this year.