Baidu

In the U.S., for better or worse, the name associated with search is Google; but in China its Baidu by a landslide. But it is not only the largest Chinese-language search engine, according to Web traffic ranking site Alexa it is also the fourth most visited site on the Web. Its 60 percent share of the China search market puts Baidu roughly four times ahead of its nearest challengers, Google and Yahoo!; and like its American rivals, Yahoo!, Google, and MSN, Baidu is expanding. The company is making partnerships in the mobile search and digital download spaces and recently announced its intention to move into the Japanese market. When Baidu went public in August of 2005 its stock price was $27, as of this writing the price is $122. China’s size and the fact that only 10 percent of its population is online suggests to some that it will be the next Internet battleground; and Baidu currently rules the day. However, some question whether Baidu will have the staying power to hold its ground against the big three as the battle heats up.

There are those that think Baidu’s grasp is already weakening. CCID Consulting believes this and remarks, “that market shares of Baidu saw a growth this year but its counterparts are gaining on it.” The Motley Fool also agrees that Baidu’s hold could shift, “The company has managed to grow its market share over the past year, yet one can't assume that stateside giants like Google and Yahoo! will take things lightly.” There is truth to that statement, but it is interesting in that it places the actions, or reactions, of ‘stateside giants’ at some point in the future; the fact is these giants and others have already tried, and failed, to take Baidu’s spot. The New York Times notes that the battleground in China is presently littered with the fallen from overseas, “Monster.com bought China HR, then lost market share. Amazon.com bought Joyo.com, and lost market share. Expedia.com acquired a big Chinese Internet travel company and slipped. And a few years ago, Yahoo bought 3721.com, its biggest competitor here, then handed its operations over to Alibaba.com.” CIBC World Markets analyst Paul Keung sees Baidu growing stronger, “Baidu continues to strengthen its market position through leveraging its leading brand, aggressive monetization, extensive distribution network, and other local advantages, while its largest rivals, such as Google, fail to catch up with its pace for localization and monetization in China.” There is no way to tell if the lead it has already will be enough or if the lead will dwindle when the giants move again. As things shake out there are those that are trying to make headway in the market by partnering with Baidu, and there are those entrenching themselves against it.

Though not one of the giants mentioned above, UK record company EMI seems to feel that partnership with Biadu is the best way into the Chinese market for digital music downloads; and it feels strongly enough about it to drop out of a lawsuit against Baidu to boot. According to Bloomberg, “EMI is planning to drop out of an infringement lawsuit brought against Baidu by record companies on claims the Web site violated copyright by offering links to illegally copied music on non-affiliated sites.” Instead of locking horns a legal battle, the Financial Times says the two companies will “co-operate on an advertising-supported online music service,” and share revenues from the “free online music streaming service in China.” At least one of the giants sees the profit in partnership.

Microsoft, made the decision to take the path of partnership with Baidu last month. At that time, the two companies announced a revenue sharing deal in which Baidu will provide paid-search listings for Microsoft’s MSN China search-engine websites. Though Microsoft is a big name for Baidu to land, the money involved is not necessarily a huge amount. Piper Jaffray analyst Safa Rashtchy estimated that it could mean between $10 million and $20 million in incremental revenue. According to the Motley Fool, “Even at the high end, that would make up less than 10 percent of the company's revenues next year.” But, the deal is worth more than money; it demonstrates an acknowledgement of Baidu’s clout. The Motley Fool puts it this way, “Even though Google may one day have something to say about it, for now, all roads to China seem to weave through Baidu.”

Google on the other hand is taking more of a head-to-head approach. Google’s approach also involves partnerships, not with Baidu, but with companies that will help it gain traction against it. Earlier this month Google invested about $5 million in Xunlei.com, one of China’s fastest growing Internet start-ups. This move is seen as a direct play against Baidu, which is well known for its digital media search and downloads. Richard Ji, an Internet analyst at Morgan Stanley, notes this, “Xunlei is a very interesting company. It’s a leader in video downloading and so this should help Google in the battle with Baidu.” Google has also entered into a mobile search services partnership with China Mobile; this too is a direct confrontation. Baidu already has an agreement with Nokia to install Baidu searching engine in Nokia handsets, and at least one other phone company is set to work with the company in this space. It is worthy to note that Google has been aware of Baidu for some time. Prior to Baidu’s IPO Google was a significant investor in the company; it sold its 2 percent after the IPO, citing their own desire to work in China.

Whatever happens with the players in China’s Internet market, huge changes are not likely to happen any time soon. Baidu has a huge lead at this point, and China represents a vastly different arena than its competitors are used to. But the competitors have money and experience on their side. In any case this will be an interesting game to watch.

A more complete version of this posting, with journal articles, and research reports can be found at the website of Analyst Views Weekly.

More information on this topic can be found in the Search Technology section of Northern Light's Internet & Information Services Market Intelligence Center.

And in the following articles:

EMI Signs Deal with Baidu, Will Drop Lawsuit Appeal
Bloomberg, January 16, 2007
EMI Group Plc., which lost a copyright infringement lawsuit against Baidu.com Inc., will drop its appeal and work with the Chinese Internet search site to win advertising by offering free online samples of its music.

EMI Pulls Out of Piracy Suit against Baidu
Financial Times, January 16, 2007
EMI has pulled out of the recording industry’s anti-piracy lawsuit against Chinese internet search company Baidu.com, with the two companies agreeing instead to co-operate on an advertising-supported online music service.

Google Makes another Investment in the Internet in China
New York Times, January 6, 2007
Baidu.com is the 500-pound gorilla in China. The company, an Internet search engine start-up began operating only a few years ago and has one of the most-trafficked Web sites in the world. The look of its home page is similar to that of Google, which invested in Baidu several years ago, but then sold its small stake for a huge gain last year, after Baidu went public on the Nasdaq.

Previewing 2007: Baidu
Motley Fool, December 29, 2006
Oh, how the cynics love to pile on Baidu.com. After coming to market as one of the hottest IPOs of 2005 and nearly doubling in 2006, the bears are positioning themselves for a fall in China's red-hot market (in general) and Baidu (in particular).

Microsoft, Baidu in Paid-Search Tie-Up
BusinessWeek Online, December 20, 2006
Microsoft has teamed up with Chinese search site Baidu in a strategic partnership centered on paid search listings. Under the terms of this agreement, Baidu's paid search listings will appear on the search results pages of the Chinese versions of Microsoft sites such as MSN and Live Search. This is expected to go into effect later this month.

Google, Baidu Eye Online Video Business in China
Reuters, December 15, 2006
Google Inc. and Baidu.com Inc., its biggest rival in China, are exploring similar options to expand their online video services in the world's fourth-largest economy. Industry sources told Reuters this week that the two Internet search leaders have independently had early discussions with some local video Web sites for potential business cooperation or possible acquisitions.

Microsoft, Baidu Form Paid-Search Partnership
CNET, December 14, 2006
Microsoft has teamed up with Chinese search site Baidu in a strategic partnership centered on paid search listings. Under the terms of this agreement, Baidu's paid search listings will appear on the search results pages of the Chinese versions of Microsoft sites such as MSN and Live Search. This is expected to go into effect later this month.

The Rise of Baidu (That’s Chinese for Google)
New York Times, September 17, 2006
While Baidu continues to gain market share in China — and does so with a Web site that the Chinese government heavily censors and that gives priority to advertising rather than relevant search results — some analysts question whether Baidu can withstand competition from Google and Yahoo, which possess superior technology and global work forces.

iPhone iLegal

Apple's announcement of the iPhone may have topped the list of tech news stories last week but the fact that they were immediately sued by Cisco has followed close behind. On January 10th , the day after Apple CEO Steve Jobs announced the iPhone by name, Cisco filed suit in U.S. District Court, and asked for an injunction that would prevent Apple from using the name iPhone in connection with its latest product. Cisco's case is based on the fact that the name 'iPhone' has been trademarked since 1996, and not by Apple. The name originally belonged to InfoGear, a company bought by Cisco in 2000; at that time rights to the name were legally transferred. Furthermore, Cisco already sells and supports a product bearing the iPhone name.

Though the general public may have been surprised to hear that the name iPhone was owned by Cisco, Apple was not. Cisco general counsel Mark Chandler says that Apple began making inquiries about the iPhone name as far back as 2001, and that his company had, "negotiated in good faith with every intention to reach a reasonable agreement with Apple by which we would share the iPhone brand." Negotiations ended the night before Apple's announcement. Chandler is quoted in the San Francisco Chronicle as saying, "We had just one issue left . . . One niche, ancillary issue that was resolvable with one conversation." That the issue was not money is made perfectly clear on Cisco's blog, where Chandler wrote on Wednesday, "What were the issues at the table that kept us from an agreement? Was it money? No. Was it a royalty on every Apple phone? No. Was it an exchange for Cisco products or services? No. Fundamentally we wanted an open approach. We hoped our products could interoperate in the future."

Despite the fact that Apple crossed a line and stepped onto dangerously thin legal ice, they are, as would be expected, forging ahead. The Financial Times says they were told by an Apple spokesman that, "Cisco’s trademark lawsuit is silly," and "if Cisco wants to challenge us we’re confident we will prevail." Apple's spokesman also referred to Cisco's claims as "tenuous," however, this term is probably more aptly applied to Apple's legal standing. There are various cases Apple may try to make in its defense, none of them as strong as they should be.

The Financial Times reports that, "According to one theory, Apple could argue that it has the right to use the name iPhone because it is part of a 'natural progression' of products belonging to a single product 'family'." That family being the one in which the iMac, iPod, and iTunes are the iPhone's siblings. Charles Golvin, a tech analyst at Forrester Research, sees this point and remarks that the name iPhone, "has been associated with Apple and the concept of a phone for a couple of years." Similarly, though the little 'i' is not the property of Apple, the company does have a string of products which begin with it and could argue that another company's use of the prefix would lead to consumer confusion. In an article dedicated to Apple's possible legal courses, CNET notes, "The most famous example of this strategy is used by McDonalds, which has successfully argued that any other company that attached 'Mc' to their product, like a McPhone, is creating consumer confusion." However, there are numerous other companies preceding their names or products with 'i', making Apple's 'family' and 'natural progression' claims relatively weak.

The strongest legal avenue for Apple to travel on may be the fact that the two products, though sharing characteristics other than just their name, operate on different platforms. Cisco's iPhone is used for VoIP and does not work over a cellular network, therefore, it may be argued, it is a distinctly different product. Apple's use of the sentence in a statement issued on January 11th, "We're the first company ever to use iPhone for a cell phone," may hint that company is heading in this direction. On this CNET refers to David Radack, chair of the intellectual property department at the Pittsburgh law firm Eckert Seamans Cherin & Mellott, saying, "No one is going to call Delta Faucet looking for a round-trip ticket from San Francisco to New York, so two companies can use the same trademark if they don't confuse the other's customer." Though somewhat illuminating, the analogy does not hold up. "The argument that Cisco and Apple are in totally different channels of trade, akin to 'Delta faucets and Delta airlines' may not fly because they are both players in hand-held digital electronic devices," says Deborah A. Basile, a trademark attorney at the Massachusetts law firm, Doherty, Wallace, Pillsbury, and Murphy. "The United States Patent and Trademark Office identifies goods and services in certain classes. Class 9 is the broad class which includes all portable hand-held digital electronic devices such as ipods, cell phones, pda's, blackberries, all software and accessories for such electronic devices. Both Apple's and Cisco's phones fall into this class."

Making any route Apple takes challenging is the fact that they went ahead fully aware that the chosen name was trademarked by a product with, at the very least, striking similarities. By doing so and developing a huge hype around the launch, Apple created what is known legally as 'reverse confusion.' CNET again refers to David Radack when they state, "Given the sheer volume of iPhone coverage and that Apple is better known among average consumers than Cisco, people might assume that Cisco is ripping off Apple's iPhone with its family of VoIP phones." This could leave Apple open to claims of damages by Cisco.

Whether due to the enormity of the excitement around the iPhone, or the image of Apple and its CEO, it seems almost unimaginable that something could go wrong with the newest in cool. But it has and is not likely to go away; Cisco is not new to the arena; a simple cease and desist order, if Apple had the legal ability to present one, would not be enough. Analysts and legal scholars believe this battle could in fact escalate. Though outcomes are hard to predict, the most likely one is a settlement, Cisco will get a little something, and Apple will get what they already have, a phone with lots of buzz.

A more complete version of this posting, with journal articles, and research reports can be found at the website of Analyst Views Weekly.

More information on this topic can be found in the Northern Light's Telecommunications & Equipment Market Intelligence Center.

And in the following articles:

How Apple Could Fight Cisco
CNET, January 12, 2007
There are a few avenues that Apple can pursue in defending itself against Cisco's lawsuit. However, no matter what the company does, it is treading uphill because Cisco has a registered trademark with the U.S. Patent and Trademark Office, according to lawyers interviewed Thursday. "As a federal trademark holder, there are certain presumptions," said Grace Han Stanton, a trademark lawyer with Perkins Coie in Seattle.

iPhone Talks Failed over ‘Open’ Stance
Financial Times, January 11, 2007
Cisco Systems’ efforts to negotiate an agreement with Apple over the use of the iPhone name fell apart because the networking group insisted that Apple’s new mobile handset be made to interoperate with its own networking devices, according to a statement by Cisco’s top lawyer.

Cisco Sues Apple over iPhone Trademark
USA Today, January 11, 2007
When Apple CEO Steve Jobs unveiled the much-hyped iPhone this week, he left one detail hanging: the rights to the iPhone name. Network equipment giant Cisco Systems owns the trademark. Wednesday, Cisco sued Apple in U.S. District Court, asking for an injunction against its Silicon Valley neighbor.

Apple Introduces Innovative Cellphone
New York Times, January 10, 2007
With characteristic showmanship, Steven P. Jobs introduced Apple’s long-awaited entry into the cellphone world Tuesday, pronouncing it an achievement on a par with the Macintosh and the iPod. Apple’s goal, Mr. Jobs said, was to translate the Macintosh computer’s ease of operation into the phone realm. “We want to make it so easy to use that everyone can use it,” he said. And he was clearly betting on translating Apple’s success with the iPod music player to a hot category of multifunction devices.

Linksys, Not Apple, Unveils New 'iPhone'
BusinessWeek Online, December 19, 2006
The iPhone has arrived, but it's not made by Apple Computer Inc., which was widely rumored to be working a cell phone-iPod combination of the same name. Linksys, a division of Cisco Systems Inc. that makes networking equipment for the home and small businesses, unveiled the new line of Internet-enabled phones this week.