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Mark O'Neill

US giant hopes to become the No1 in China by buying up the competition

This autumn 1,000 search-engine servers from the United States  were installed on the 14th floor of an office tower in Beijing. They belong to Yahoo!, one of the world's two biggest search-engine companies.

The office also houses the servers of China's three biggest internet companies - Sohu.com, Sina.com and Netease - and Baidu.com, one of the leading search engines. In June, Google invested US$10 million in Baidu.

The  server shipment symbolises Yahoo!'s assault on a country in which it has been a minor player, but which has now become the second-biggest internet market in the world after the US, with 80 million subscribers.

Yahoo! has been  making up for lost time, seeking to build a dominant position in the mainland market through new products, acquisitions and alliances.

Existing players are watching  this invasion with unease. Cash-rich Yahoo! has a market capitalisation of US$46 billion, against about US$1 billion each for  Nasdaq-listed Sohu, Sina and Netease.

Few sectors in the mainland are more open to foreign competition than the internet - with the critical exception of content.  But the same censorship rules apply to all  players, Chinese and foreign. This openness gives Yahoo!, with its billions, freedom to acquire its rivals  to obtain a bigger market share.

The assault began  in November last year, when Yahoo! spent US$120 million to buy 3721 Networld Software, which controls  search-engine provider Beijing 3721. Then in March, Yahoo! appointed 3721's founder Zhou Hongwei as its China president.

In June,  it launched the Chinese-language Yisou.com (meaning first search) - the first time it has registered a new website for its search-engine service in a country outside the US.

'Many things that we did not do in any other Yahoo! market were done in China,' said David Lu, the deputy managing director of the company's North Asia operations.

On October 19, Yahoo! announced that it had formed an alliance with 12 mainland companies - which account for more than 50 per cent of the country's internet users - to provide them with e-mail and other services.

'China clearly is right at the top of the list of that next wave of countries that Yahoo! could and should be more aggressive about, do a better job in and provide better services in,' chairman and chief executive Terry Semel said during a visit to Beijing  earlier this year.

'In the past few months you've started to see Yahoo! make moves beyond what it had done before. You will see other things coming from Yahoo!'

Yahoo! aims to become the  No1 player in China's internet search and e-mail service market within two to three years.

'Search, e-mail and instant messaging will be three major business areas for Yahoo!,'  Mr Zhou said. 'Now is the right time for Yahoo! to make a big push in China. We are confident that Yahoo! will eventually defeat Google to dominate China's internet search market.'

According to Shanghai iResearch, an online market research firm, the mainland internet search market  will be worth 840 million yuan this year and 2.3 billion yuan next year, up from 500 million  yuan last year.

Yahoo! also wants to expand into on-line auctions and games, announcing  a joint venture with Sina in January.

'We are doing some gaming outside Europe but not nearly as much as we should,' Mr Semel said. 'This is definitely an area that has experienced real growth, has real potential up ahead on a worldwide basis.'

Zou Lei, a research director at iResearch, said: '[Yahoo!] will acquire companies to complement its weak points. Its strength is in its e-mail, because it started early, is free and has built up an enormous market abroad.

'[But] Yahoo!'s e-mail, search and short messaging have no competitive advantage in China,' Ms Zou added.

'Its content has had a problem because it is a foreign firm. As for the 12 companies in the alliance, each has its own strength which Yahoo! cannot copy. Customer size alone does not determine if you are good or bad.'



Yahoo! searches for the easiest way to expand