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  The Launch of Baidu "HI" in China
April 9, 2008

In March 2008, Baidu (Nasdaq: BIDU) launched its "Baidu HI" instant messaging (IM) service, and it shook China's Internet world. Baidu, and not Google, is the search engine leader in China, accounting for nearly 60% market share.

And in China, IM adoption is much higher than email; Chinese users are as likely, if not more so, to exchange IM addresses as are email. Baidu HI beta has been out for quite some time, and initial interest has been strong.

IM in China has quite a number of what is considered basic features, such as voice/video chat, IM groups, file transfer, and user personalization. Baidu HI has almost all those features.

Given Baidu's dominance in search and the strong prevalence of IM, we examine what are the advantages and challenges Baidu has, and will increase the chances of Baidu HI's success.

Baidu's built-in advantages

Besides being the search engine leader in China, Baidu has steadily built an online community around its search. There are built-in synergies Baidu HI has with Baidu's other offerings.

To start, Baidu HI is integrated Baidu Space, the company's online blogging service launched in 2006. But this appears just the first step.

Baidu Zhidao (directly translated means "Baidu Knows") is the leading online question and answer forum in China, and one of Baidu's core products. According to the company, over 10 million Chinese use the platform every day and its popularity is nearing that of Baidu MP3. Even more users go to Baidu Tieba, one of China's largest online communities.

With such a rich online community developed, users in the past had to use IM through providers. The launch of Baidu HI appears to fill this need naturally.

Big challenges still remain

The biggest challenge is that Baidu will be entering into a crowded IM space. Competitors include large, resource-rich, and entrenched ones such as Tencent's (HKEX: 0700) QQ and Microsoft's (NASDAQ: MSFT) MSN Messenger. From the mobile side there is China Mobile ((NYSE: CHL) Fetion.

There are also a number of second-tier IM players, such as Netease (NASDAQ: NTES) Popo and Lava-Lava. Even Google's (NASDAQ: GOOG) Google Talk has experienced mixed success in the China IM market.

Baidu HI critical success factors

In order for Baidu HI to be considered a success, it must either be able to generate profit in the longer term, or generate profit "leads" for Baidu's other products. We consider the factors for such a scenario:

Competitive Offering. Notwithstanding Baidu HI's clever viral marketing of allowing select users to create IM groups, Baidu HI must have features that are as powerful, if not more so, than its competitors. It appears from their initial launch that they have achieved this.

Timing. Too early, and Baidu HI risks not having enough of a loyal user-base to gain necessary momentum. Google Talk is a case in point. Google did not have enough of a Chinese online community at its Google Talk launch; hence, it lacked a strong start which still plagues it today. Baidu chose to launch Baidu HI after it had established its online communities.

Too late, and strong IM competitors will entrench further. Baidu appears to have the right timing here, given the strength of its current IM providers.

Synergies. Baidu HI's initial competitor will not be the IM providers like QQ or Messenger; rather, its focus should be on enhancing and completing the overall Baidu online community experience. Lose sight of this focus, lose Baidu HI's fundamental value proposition, at least initially.

C2C Lynchpin. Baidu has announced, at the end of 2007, its plans to launch C2C trading services. This can be a compelling move for Baidu, given its online community. One of the biggest inhibitors to China's consumer e-commerce development is the lack of trust. If a person buys from somebody he or she does not know, will the product the right one, and shipped on time?

Baidu's brand, established online communities, and in the future, C2C trading platform, will go a long way to overcome the lack of trust barrier. Baidu also has a virtual currency offering that the company can leverage. And Baidu HI can further establish trust with direct communication. Equally important to Baidu is the C2C profit potential. Other C2C trading business models have been proven cash cows.

Of course, other very formidable competitors have already thought of this. Alibaba's (HKEX: 1688) Taobao is the largest C2C website in China, and it has elements of an eBay, Amazon, Facebook and MSN which allows the Chinese shopper to search, browse, trade and purchase products. Alibaba's Taobao Wangwang IM enables instant communications between buyer and seller. The number two and three C2C websites are Eachnet (formerly Ebay China) and Tencent Paipai.

Competing from a position of strength.

It comes down to optimally configuring and leveraging Baidu's assets, and in particular, Baidu's various online community offerings. Baidu may also supplement additional value-added services to complete the overall online experience. Baidu's move in IM with Baidu HI is a smart one.

Baidu's move is coming from a position of strength, but doing so also moves it right in line with other large, successful competitors. If Baidu finds success in its C2C platform, then Baidu HI's other competition may be directly to the existing IM providers, such as QQ and Messenger. But the competition will no longer be just IM, but IM within the overall online community and trading experience.

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