Digitalwall: Predictions on China Internet Market (5) Search Engines

The market should be observed again in perspective of the user quality and revenue.

[+] The search engine market is getting saturated soon

As the size of online information volume, which is already an immense one, continues to grow, it is getting increasingly hard for users to find what they want. This explains why search engines have been receiving more and more attention since the birth of Google. Today, the sector is even dubbed "the fourth barrel of gold" in the Internet market.

However, if you are dumbfounded by the hot pursuit after search engines in the market and the drastic growth in user numbers during the past one or two years, and believe that the segment still has three to five years of sweet days to come, I would like to remind you of changing your expectation a little bit.

At the very beginning of this study series, I explained that China's Internet market is already in its saturation stage, and that the growth of the user number is starting to slow down. However, some applications would start their growth stage only after the Internet market gets into its saturation stage, while many others just go along with the big market into their own saturation stage as the overall user number growth slows down.

The following figure shows the proportion of Chinese Internet users that often use search engines. Obviously, it is maintained at the 60% level regardless of how fast the overall Internet user number grows. We have to admit that, on the Internet, there are a portion of people that do not need the search engine.

[+] New users or old users

It is true that the users of search engines are increasing along with those of the Internet. However, there is no significant difference between the growth rates. Therefore, when the growth of the overall Internet user number slows down, that of search engines will follow suit.

While search engines are still fighting for their shares of the market cake, few have noticed that the time is coming that the size of the cake stays unchanged. Obviously, the customers that one company pulls in might well be existing customers of other companies, instead of new Internet users.

Roughly, existing players in the market could be divided into a few classes. The first class includes pure search engines, such as Baidu and Google. The second includes leading general portals that operate search engines too, such as Yahoo! China, Sina and Sohu. The third includes a number of new faces, such as Tencent.

For all players, however, one common question is: as China's Internet market still has 60 million new users to come, is it a faster approach to start looking for new users now, or to attract existing users from their rivals? The question is of particular importance to those lagging behind.

[+] Investment on technology should be the top priority

A distinct feature of search engines is the fact that it is hard to control their users. As every search engine has followed the example of Google to offer a clean and simple homepage and does not request login, users could switch to other search engines at any time.

This feature requires search engines to have stronger technology ability. It is very easy for users to abandon a search engine, if it cannot help them to find or pinpoint the information they want. However, those with stronger technology ability and significantly smooth user experiences could be able to grow their user bases much faster.

It is because of this feature that Google and Baidu have been able to expand their market shares rapidly during the recent years. As to so-called 3rd Generation interactive search engines, such as Yahoo! Answers in China (ks.yahoo.com.cn) and Sina iAsk (iask.sina.com.cn), they are only minor players in the search engine market. Technology is the foundation. Without a solid foundation, interactions between users when they search will be insufficient to support those players.

However, sometimes, technology leadership is not an easy thing to do, particularly when all the rivals in the market are making big investments to enhance their technology ability. Users might not be able to feel any significant difference between search engines. Therefore, one thing a technology leader must do is to start large scale development of services that require users to log in.

[+] Introducing registration-based services to retain users

For search engines, it is easy to both get and lose users. How, then, could industrial leaders prevent from the loss of users? The first step to establish a relation with users is to request them to register, and to introduce services that request login. Those services could turn out to be a good reason for users to stay with a particular search engine.

One example is Google's free email service, Gmail, which integrates keyword search and content match advertisement. At the end of the last year, Google completed tests for its personalized search, which allows storage of search results of each user, or even the setup of an exclusive customized search engine. To use this service, users have to log in with their Gmail ID.

Besides, the community service is also a powerful weapon to prevent the loss of users. As I said, the community service has the feature of "Member Gets Member" or "Member Retains Member". In addition to its registration and login requests, the community service is also known for the high stability and loyalty of their members.

The purpose of the community service is to secure the user base. In that sense, the community interaction-oriented search service, such as the one offered by Yahoo! Answers in China and Sina iAsk is a weapon not for attack, but for defense purpose. Therefore, it is no more than a minor player in the search engine market.

[+] Different behaviors between existing users and new ones

Currently, there are already 120 million users (old users) in China's Internet market, with an additional 60 million (new users) expected to emerge in the next few years. If a search engine launches a massive advertising campaign on TV, which type of user could it attract most easily?

After Jack Ma, the CEO of Alibaba.com, took control of Yahoo! China, he repositioned it from a portal to a search engine. By the end of November in 2005, he had burnt RMB 110 million on TV commercials and even carrying out entertainment marketing campaigns in collaboration with the music industry.

If you are a user of Google or Baidu and appreciate their powerful search abilities, you would not switch to Yahoo!'s search engine just because of its TV ads. Obviously, Jack Ma's strategy would only appeal to the users who are new to Internet, or even new to search engine.

The strategy is a right one in the early stage of a saturated market. However, the player needs to be aware that it is trying to attract new users. Once the strategy is set, there need to be continued offline marketing activities to ensure a satisfactory result, as in the saturation stage, users are more susceptible to the influence of ads, and apt to sticking to the first service they come across.

[+] User quality and keyword search ads

Users of Google and Baidu are those who rely heavily on search engines. With an average search volume larger than that of Internet green hands, those users are different from the new users targeted by Yahoo! China. However, the average search volume per user only means the operation cost for a search engine. It is the click volume per user on the keyword ads that generates revenue.

As I have observed, users of Google and Baidu rarely click the keyword search ads that the search engines depend on as sources of revenue, despite their large search volume. That is a feature of the users acquired in the high-speed growth stage of the market. For users acquired in the saturation stage, it is just the opposite: smaller search volumes but higher advertisement click rates.

The above figure is based on the data from 2005 Annual Report on China's Search Engine Market released by iResearch. Obviously, in terms of usage, Baidu and Google have the largest market shares. However, it is not the case in terms of revenue, which has the structure resembling a sand pyramid. For Yahoo! and Sohu, the situation is just the opposite.

The strategy of market segmentation would change in accordance with the attributes of users. Therefore, players need to think carefully about which type of user they want. The former has lower ad click rates. However, with its massive user base, it could achieve high ad clicks. In the case of the latter, the number of users is limited. However, they might prove to be users of higher value.

As to the functional segmentation and specialties of search engines, such as the MP3, image and map search, which have been hot topics of the media lately and everybody is doing, there is nothing else beyond the technology ability and information volume. Therefore, they are not really market segmentation. The real market segmentation should be discussed from the viewpoint of user quality and revenue. (
2006/03/26 - By Digitalwall.com - Way to
China Internet/Telecom )