The only rival Google fears

8 mins. to read
The only rival Google fears

Microsoft changed our lives. I couldn’t have written this article without their technology, and you couldn’t read it. Some say that Apple is the technological touchstone. Then again, so many seem to be drawn to Facebook, like moths to a flame. Many others swear by Twitter.

Personally, there is one technology titan whose services I use so frequently that it has pretty much changed the way I think about everything. I use its portals scores of times a day. I check facts, pursue ideas and indulge my idle curiosity. I’m talking about Google.

Google’s young founders, Sergey Brin and Larry Page, took Google from being just another internet start-up in 1998 to a company with a colossal market capitalisation of about US$365 billion today.

The Google story is one of the triumph of the intellect over a practical problem. The problem was how to find the web page we need, out of the billions available online. But that was only the start. As we know, Google then began to leverage its universal presence on the internet to become an information company.

Now, Google is evolving from an information company into a world leader in artificial intelligence. I woke up to this in January last year when Google purchased DeepMind Technologies from its founder, the British computer guru, neurologist and all-round genius, Demis Hassibis, for £400 million. (DeepMind’s mission statement, by the way, speaks of nothing less than the replication of the human brain in machine form[i]).

But I’m not going to sing Google’s praises here. Rather, I want to tell you about the one company in the world which keeps the Google top execs awake at night.

Over in China, there is a dragon of the internet, which is just beginning to awaken. It has had astonishing success in its home market and it has shown a Google-like aptitude for developing technology. Some say it has a clear ambition to take on Google and to bestride the globe (just as China itself, many would contend, aspires to challenge the primacy of the USA, in time).

China, with around 600 million regular internet users, has nearly twice as many people connected to the internet as the USA. It also has more mobile phones per person – and about 500 million smartphones in China are connected to the net.

I’m not talking about Alibaba. I am talking about Baidu Inc. Baidu has, by its own estimation, a 73% share of the Chinese internet search market.

Baidu’s name comes from the last line of a romantic Song Dynasty poem written more than 800 years ago[ii]. Baidu, meaning “thousands of times”, refers to the perseverance by means of which the search for the earthly ideal is fulfilled. The name Google is a misspelling of googol – the number one followed by one hundred zeros. I find Baidu’s name more poetic, and very oriental. You can understand why it has become one of China’s biggest brands.

Baidu was founded by Robin Li, who should be at least as well-known as Alibaba’s Jack Ma. When the history of internet technology is written, Li’s name will probably rank up there with Page, Zuckerberg and Berners Lee.

Li, the only son of factory workers from Shanxi province, developed the RankDex site-scoring algorithm in 1996, while working in New Jersey for a division of Dow Jones. He still owns the US patent to prove this. The PageRank algorithm developed by Larry Page (which later powered Google) was, it is said, inspired by RankDex.

Founded in January 2000, by 2007 Baidu had become the first Chinese company to be listed on the NASDAQ.

Baidu provides a cluster of platforms to find and share information. In addition to the core web search product, it powers many popular community-based products. Baidu Post Bar is the world’s first and largest Chinese-language query-based online community. Baidu Knows is the world’s largest Chinese-language interactive knowledge-sharing platform. Baidu Encyclopaedia is the world’s largest user-generated Chinese-language encyclopaedia (bigger than the Chinese version of Wikipedia). Also, Baidu offers real-time newsfeeds and a Chinese version of Google Maps.

Baidu’s revenue model, like that of Google, at the moment, is essentially an advertising company model. In 2013 Baidu generated 99.5% of its revenues from online marketing services and display (e.g. pop-up) ads, which are charged on a pay-for-performance (P4P) basis. These ads appear on Baidu’s own-brand websites as well as on affiliated websites within Baidu Union. The Baidu Union enables the company to guide web traffic to its customers’ sponsored links. Baidu pays Baidu Union members and receives fees from advertisers. Payments made to Baidu Union members come under Traffic Acquisition Costs in Baidu’s accounts.

Baidu’s customers are predominantly Chinese small and medium sized businesses as well as large corporations. Baidu sells its online marketing services through both its direct sales teams located in Beijing, Shanghai and Guangdong and through its distribution network.

So, Baidu is the leading internet search engine in China, with greater market penetration than Google China or local operators such as Sogou, Qihoo 360 and Alibaba. But it is much more than that. Baidu is a technology powerhouse with soaring ambition.

Last summer, having conquered the Middle Kingdom, Baidu began its invasion of the world – starting in Brazil. Indonesia, Thailand, Egypt, Pakistan and Mexico are next. These are all countries with huge unsatisfied demand for digital services, and make good seed beds for Baidu’s developing technology.

Last year, Baidu announced a visual search engine powered by neural networks. These are computational models inspired by the study of human and animal neurology.

Recently, Baidu has confirmed rumours in China that it has been developing a bicycle that can peddle itself through packed city streets[iii] – a charming Chinese analogue to Google’s much vaunted self-driving cars. The idea may sound frivolous; but it is another example of how information companies are morphing into artificial intelligence companies.

In May 2014, Baidu hired Andrew Ng, a Silicon Valley-based computer scientist who founded Google Brain, to lead a new research centre called AI Lab, focussing on speech recognition, computer visual recognition and language processing. These are all technologies that could yet revolutionise the way we use the internet. AI Lab plans to build the world’s largest cluster of data mining computer networks.

The connecting thread between internet search engines and applications which simulate intelligent human thought is Big Data: the ability to take huge quantities of information and to interpolate patterns and connections which can offer insights into what is really going on.

Most information already available on the internet is tagged (labelled). That is to say that someone – a human – has already labelled an image or a piece of text. For example, members of your family might have posted photos of your family cat on Facebook, labelled, “Our Cat”. No problem there for averagely intelligent machines to search for pictures of pussy cats.

But, supposing a computer system could find unlabelled photos of cats on the World Wide Web, and identify them as “cats” – and then classify them according to colour, breed and location – whatever. This involves unimaginable computing sophistication. In fact: artificial intelligence.

Baidu probably has to dance to a tune played by the Chinese Communist Party, but let’s remember that China is a society in transition. According to the Economist[iv], the most rapidly growing affiliation in China is Christianity; and Chinese Christians are apparently keen internet users. Ultimately, Baidu is not the Chinese state any more than Google is the USA. Baidu’s own literature subtly advances the idea that the internet is making China a more open society. I am inclined to believe that this is true.

Ray Kurzweil, the eminent American futurologist (and Google director) has predicted that AI will surpass human intelligence – a point ominously called the singularity – in around 2045[v]. One hopes those super-intelligent machines will not find us humans too tiresome.

I’d be surprised if Baidu isn’t one of the key players in this Brave New World. And big data in the largest country in the world is an awesome notion.

Moreover, Baidu makes money. For the year ending 31 December 2014 sales were RMB49.052 billion ($7.906 billion), a 53.6% increase from 2013. Operating profit was RMB12.804 billion ($2.064 billion), a 14.4% increase on 2013. Compare Baidu’s return on equity of 27.64% with Google’s 14.57%[vi]. And it is hugely cash rich, meaning lots of money to invest in technology.

The risk associated with this investment is that revenue growth from online advertising may stall in any economic slow-down. Another issue for some analysts is whether Baidu may yet fall foul of China’s 2008 anti-monopoly legislation, which until now has never been enforced. It may or may not help that the holding company for the group is incorporated in Hong Kong.

Baidu’s is a high volatility stock. Last autumn Baidu’s shares rose rapidly, reaching an all-time-high of US$250 in November. Since then, the stock has traded down to below US$200 despite a rebound to US$220 in the first week of May. (Alibaba’s shares have fallen by even more).

The main drag on the price has been that Alibaba has been snapping at Baidu’s heels in the mobile advertising sector, where it is poised to overtake Baidu’s revenues this year.

The fact remains, however, that Baidu is expected to record $4.53 billion in mobile advertisement revenues, up 80% from the $2.53 billion that it earned last year. Despite Alibaba beating Baidu in mobile advertisement revenue, e-Marketer Research predicts that the Chinese search engine giant will still be the undisputed leader in overall internet advertising this year. The company’s search engine revenue is poised to exceed US$7 billion in 2015, compared to US$5.3 billion in 2014. Over the last year, Baidu has strengthened its presence on mobile devices.

Total revenues in Q1 2015 were RMB12.725 billion ($2.053 billion), a 34% increase from the Q1 2014. Mobile revenue represented 50% of total revenue for the first quarter of 2015, up from 42% in the fourth quarter of 2014. Operating profit in Q1 2015 was RMB2.155 billion ($347.7 million), a 9.2% decrease from the corresponding period in 2014.

The Chinese Google can withstand a little friendly competition on its home turf, and is expanding precipitously in emerging markets. The 2-3 year upside is phenomenal. Soon, we might all be reciting a 12th century Chinese poem.

[i] See:

[ii] Attributed to warlord and poet, Xin Qiji (1140-1207).

[iii] See New Scientist, 26/07/2014, China’s Google is on a roll, page 22

[iv] The Economist, 31/10/2014.

[v] His book, The Singularity is Near, was a number one best seller on Amazon.

[vi] See:

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