BREAKINGVIEWS - Microsoft gets message late on China market

A photo illustration shows Baidu's website and Microsoft's logo on computer screens in Shanghai July 5, 2011.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own)

By Wei Gu

HONG KONG (Reuters Breakingviews) - Microsoft (MSFT.O) has belatedly got the message: going it alone in China is no fun. Google already gave up offering online search in China. Yahoo sold its China portal in 2005. Now Microsoft has agreed to share its search results with local giant Baidu (BIDU.O), apparently for free. Meanwhile, its current joint venture partner is looking for an exit, Breakingviews has learned. Microsoft needs an even bigger strategic rethink to succeed in China's huge market -- and buying a stake in a rival would be a good start.

Baidu has agreed to direct English-language searches to Microsoft's Bing, which will deliver the results back to Baidu's web pages. For that Microsoft gets no money, but some branding benefit, as users will see the results are from Bing. Whether English speakers will now choose Bing remains to be seen. Google is still a major force, via its Hong Kong site. Baidu and Google together have 97 percent market share in online search, according to China's iResearch.

Microsoft previously brought in partners for mainly political rather than strategic reasons. It set up an Internet joint venture in 2005 with Shanghai United Investment, controlled by son of former Chinese president Jiang Zemin. But local competitors have been aggressive. Tencent now controls more than 70 percent of China's instant messaging market share, according to Morgan Stanley, while Microsoft's share has been falling. Shanghai United is considering selling its 50 percent stake, possibly to Nasdaq-listed second-tier operator NetEase (NTES.O).

Instead of trying to be another Google, Microsoft's best bet is to be more like Yahoo. That company sold its struggling China portal to local rival Alibaba in 2005, in return for a 40 percent stake. Thanks to China's rapid growth, the stake is now equal to about half of Yahoo's enterprise value.

Microsoft should also consider using its large cash pile to take a stake in a strong Chinese player. Microsoft may consider taking a 10 percent to 20 percent stake in NetEase, which has a search engine of its own, according to a person familiar with the situation. With local competition rising fast, Western internet companies need to think beyond small tie-ups. Since Microsoft can't beat them, there is no shame in joining them instead.

CONTEXT NEWS

-- China's search engine Baidu will partner with Microsoft for English-language search, the companies said on July 4. Baidu will direct English searches to Microsoft's Bing, which will deliver the results back to Baidu's Web pages.

-- The new tie-up, due to be launched later this year, builds on existing cooperation between Baidu and Bing on mobile platforms and page results. The deal does not involve a financial component.

-- Baidu has 74 percent of China's search market share by ad revenue, followed b y 23 percent for Google as of the first quarter of 2011, according to Chinese Internet tracker iResearch.

-- Baidu made $1.2 billion in online marketing revenues in 2010, up 78 percent from 2009. Microsoft's total online advertising revenue in fiscal 2010, including a small contribution from Bing, was $1.9 billion.

-- For a Reuters story: Baidu picks Microsoft for English search, click here

(Editing by John Foley and David Evans)