June 8, 2004

Google has been a real success at home, but its biggest struggle may be unfolding on the shores of China, Japan and Europe.

The future of the premier search engine company increasingly will be fought abroad, experts say, because growth in revenue from online advertising is slowing in the United States. By contrast, it's doubling in many countries overseas, where the market is just ramping up.

Like its competitors, Google makes most of its money from advertising placed next to online search results.

Google is already the most popular online search site in many countries, operating 96 different Google Web sites in 97 languages.

But as the 6-year-old Mountain View company prepares to go public, it faces a host of challenges in making money from its leading position abroad.

Google must span cultural chasms among users in different countries viewing Web sites in their native languages, and woo foreign politicians anxious about giving it too much sway.

It faces intense competition from its more experienced archrival, Yahoo, and must decide to fight or ally with entrenched local competitors in foreign countries. It's unclear how soon Google will make money in some online ad markets that are just developing.

"That battle is yet to be played out," said Brian McManus, who leads the search business at InfoSpace, a company whose search engine uses both Google and Yahoo's results.

Google and Yahoo together hold a narrow lead in search-related advertising over most other players in Europe, but the race is wide open across most of Asia, says McManus.

Google won't comment on the skirmishes. In its filing to go public, though, Google warns: "Our inexperience outside the U.S. increases the risk that our international expansion efforts will not be successful."

The company has scrambled to open offices in 10 foreign countries in less than three years.

Google's revenues from abroad jumped to 29 percent of its total sales during the first quarter, up from 26 percent a year earlier. And it's likely to keep growing.

The U.S. search-related ad market remains the world's largest, but the international market for search revenues will grow to $1.9 billion in 2007 from just $200 million last year, estimates investment bank U.S. Bancorp Piper Jaffray.

China is expected to be the market to watch. Its online ad revenue is still minuscule, but is growing 50 percent a year, says Piper Jaffray analyst Safa Rashtchy. So far, only 6 percent of China's population is online.

But Google's popularity has led to run-ins with Chinese authorities anxious to control public opinion on issues like Tibet and Taiwan. Beijing shut down Google in September 2002 without explanation, but a public uproar in China forced the government to back down.

Since then, China and Google have been on tenterhooks. Beijing has endorsed a local search engine, called Zhongsou.com, that has been backed by China's three main domestic Internet portals: Sina, Sohu and NetEase. (Sohu is launching its own search technology in July.)

In February, Google began offering advertisers a way to list ads next to its Chinese search results. While it has brought in millions of dollars in revenue already, Google has been unable to recognize those sales on its books, according to people close to the company. That's because it has no office or employees in China and no license to do business there. Google's executives have made multiple trips to Beijing to sort the problem out.

Now, Google is making an investment in one of China's largest search engines, Baidu, which means "hundred times." Google won't comment, but the investment was confirmed by U.S. investor Tim Draper of Draper Fisher Jurvetson, which invested $10 million in Baidu. The move might give Google a way to secure its position in China and gain leverage over its chief competitor there.

Google must contend with cultural differences, too. In China, as well as Japan, the difficulty of typing Asian language characters on a computer means it's more tedious for users to enter terms in a search box like Google's, noted Jakob Nielsen, a usability expert and early adviser to Google.

One of Google's biggest challenges in China will be marketing, says Guo Liang, a professor in the Chinese Academy of Social Sciences and an expert on China's Internet. Unlike Yahoo, which translates as "elegant tiger," or Chinese portal Sohu, which means "search fox," Google has no Chinese name. Many Chinese Internet users "don't even know Google, especially in small towns," Guo said.

In Japan, currently the world's second-largest market in terms of search users, online advertising remains severely stunted. Moreover, Yahoo gained an early entry into Japan when one of its first investors, Masayoshi Son, built Yahoo Japan into the country's largest portal.

Two years ago, Google won a contract with Yahoo Japan to provide text advertising _ called paid listings _ beside Yahoo Japan's search results. But last week, Yahoo booted Google, instead taking paid listings exclusively from its subsidiary, Overture.

In the United Kingdom, the second-largest search advertising market by revenue, Google remains neck and neck with Yahoo. Last year, Yahoo's Overture subsidiary won the search business of U.K.'s largest Internet access provider, Freeserve, supplanting Google.

Still, while Yahoo has sewn up advertising alliances with Freeserve and other Internet providers, many users still switch over to Google to search, says Lee Colbran, who runs Fresh Egg, which manages ad campaigns for U.K. companies. "Seven or eight times out of 10, Google is going to be the search engine of choice," he said.

Germany is also hotly contested _ but there Google has gained the upper hand. Germany's former telecommunications monopoly, Deutsche Telekom, owns the premier Internet portal in that country, T-Online. That company first turned to Yahoo's Overture for its paid listings. But threatened by Yahoo's other portal offerings, T-Online last year dumped the contract, and signed up with Google instead. Yahoo has since dragged T-Online to court for breach of contract.

Ultimately, some countries might prefer to have search technology provided by homegrown companies, said Danny Sullivan, editor of Search Engine Watch.

"Search is essentially a U.S.-based business, similar to how Boeing once seemed to have the lock on the majority of aircraft orders," he said. "Europe reacted by supporting Airbus.

Similarly, we might see countries outside the U.S. react to help build or support local search technologies. That potentially could reduce gains by the leaders Google and Yahoo."

Source: San Jose Mercury News

        

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