Searching for China's internet Gold

Search engine technology is the new hotspot in China. It is hardly surprising. As the Web grows to ever more gigantic proportions, it becomes more and more important to bring method to the madness.

The first stage of searching the Internet was simply to organize the information in some way. So a first generation search engines organized a categorized database, and returned results. The performance indicator for this first-generation search engine was 'hits' - the number of the relevant results.

But with the proliferation of websites, search results for popular key words come in the millions, making them increasingly useless for end users. So the second generation search engine's task was to rank results in terms of relevance. That was where Google took the lead.

"Now we are at the third stage where the amount of information is even greater and people are no longer happy with the ranking system," says Chen Bo, senior vice president and co-founder of Zhongsou.com, literally translated as China Search. "So we need to rely on the third generation artificial intelligence systems - the intelligent search engine which guesses what it is you really are looking for."

Chen Bo, sitting with his elder brother Chen Pei in identical navy sports shirts with the company logo blazoned across it, should know. He has worked in the search field ever since Chen Pei head-hunted him last year from his well-paid job in the US, where he had worked as a senior level manager for several blue chip software consulting firms, such as Hyperion.

Bo regrets leaving the skiing slopes of Aspen, (his special love), but is realistic about how much more he could have achieved in the US, where he had originally obtained his PhD and MBA.

"I never encountered outright racism in the US, and had achieved a good position. But for the really senior US jobs, where personal skills are so important, it's important to have seen the same cartoons when you were kids," he explains of his decision to start (almost) afresh in China.

Chen Pei, the elder brother, was the original driving force behind the company.

An affable former military technology expert, it was his vision and entrepreneurial instinct that has brought the company to its present stage.

Pei (his given name) entered the army in 1982 because it seemed the safest option at the time.

"Those were very uncertain times (reform and opening was barely kicking off, just a few years after the end of the Cultural Revolution in the late 1970s) and the army seemed the best solution after university," says the Zhejiang native.

After leaving the army ten years later, Pei plunged into another intelligent search venture - on his own.

Despite his determination, the going was hard. Fraught with financing difficulties he eventually accepted a senior post for the Hong Kong-listed HC Group, where he was put in charge of a division.

"The HC Group was the perfect stepping stone to my vision of creating a search company," explains Pei. "The company deals in directories, so it already has a lot of experience in sorting and classifying information."

The next step was to persuade the company to allow Pei to take charge of spinning off the company, clearly with a future listing in mind.

That has lead to a situation which is normally anathema to entrepreneurs: the brothers are not the majority owners of the business. Rather, it is the parent company.

The brothers look a bit unhappy when I bring this point up. It iw clear that control and financing are the two poles between which entrepreneurs must make their way, and it is equally certain that many entrepreneurs have valued their companies so highly as to scare off investors just as they have lost out by giving up their assets too cheaply.

Currently, Huicong International Group, the parent company of the Hong Kong-listed company, owns 57.6% of the company, Wanguoqiao Investment 20% and the Chen brothers, together with management a modest 14.4%. Private equity group IDG owns 8%.

Pei answers thoughtfully that the key of the success of the business should not be boiled down to such an issue.

"We believe that we are dealing with some very exciting technology. We also believe that once we've made ourselves the top player in this field, when we are the best, the money is sure to follow," he opines.

Yes, money and there is plenty of it about, according to statistics from Shanghai-based research house iResearch, which estimates the search engine market in China recorded revenue of Rmb 500 million ($63 million) in 2003, a year-on-year increase of 117%. iResearch predicts that revenue from the search engine market will grow at an annual rate of 60% to 70% in the three years from 2004 to 2006, reaching Rmb 2.3 billion ($278 million) by 2006.

China Search succeeded in breaking even in its first year of operations and the company achieved revenue of Rmb 160 million last year, achieving Rmb 1.3 million in net profit. The outlook for this year is far stronger with profits of Rmb 12 million booked so far.

Representing 20% of the world's population, the Chinese language is spoken well in excess of English in terms of the number of native speakers - so Chinese language searches cannot be ignored, especially in such a rapidly growing economy. With Google's $1.6 billion IPO on everybody's lips, the US company's commercial success has become the benchmark for the China market.

The challenges in the search industry are great. New revenue generating models have had to be developed, as well as technologies for duplicating human analytical and search skills - since, as the Web grows ever more enormous, human searches become ever more laborious.

Google has spearheaded many of these innovations. It has developed a system for sending ads relevant to the search terms entered. Controversially, it has used the same technique for targetting users of its newly launched email service.

This advertising technique is a massive advance on the advertising you still see on many sites, especially in China. The worst of these are the numerous pop-ups which explode onto the screen as soon as you hit any Chinese portal, since they are far less targeted than the Google technique as well as causing irritation to users.

Despite its short two-year history Zhongsou has already licensed its search to Sina.com, China's leading portal, knocking Google out of the way in the process.

"This is a big coup for us. It's not that much of a revenue spinner, but it confirms we have the best technology in China," notes Chen Pei.

Search engine technology has an intrinsic conflict with providing the most relevant information and using the service as an advertising platform. Thus ranking a company higher or lower within the search results depends on how much money the advertiser is willing to pay. For example, a coffee vendor might pay to have his website appear high on the ranking of the search results for the term 'coffee beans'.

The brothers have understood the importance of narrowing searches down. Thus, they also have pure news searches, which presents news in different formats, tailored according to user specifications. There are also separate search categories for images, games, shopping, MP3s, regions and industries.

A nice touch of the Zhongsou website is the downloadable toolbar, featuring a piggy mascot. Once it is installed, users can double click on any word of picture on both web pages and Word documents to bring up different search category results.

The company generates revenue from offering companies the chance of replacing or complementing their own single website with a higher or lower ranking on search results returned by the seven leading national portals (Sina, Sohu, Wangyi, tom.com, 3721.com and 263.com) with whom Zhongsou is affiliated, as well as another1400 regional websites.

These websites and many other have organized themselves into a web alliance to improve searches amongst their users.

With the search results categorized in many ways different ways, such as among 800 websites reflecting 100 industry categories, ad space buyers hope their ads will have a better chance to find the right target market.

Zhongsou charges Rmb 50,000 per year to corporate users to appear on their search results.

Another revenue generator is to charge users for niche searches, such as for news items.

The battlefield is getting congested in China, with Google itself present through its acquisition of a minority stake in search technology company baidu.com. Baidu powers the search engine for tom.com and was itself ranked fourth in the world according to Internet traffic, according to one consulting firm.

Yahoo has also moved into the China market, snapping up 3721 Network Software, whose technology powers 3721.com, a search portal.

Yahoo has also set up Yisou.com, which claims to have the biggest database of any local search engine.

Yisou has found a solution to the advertising/pure search dilemma since Yisou will not do commercial searches in the hope the spin off services of the website will provide revenue. The Yahoo.com.cn site will, however, still run commercial searches by selling key words and rankings to customers.

It is clear there are many variants to this game and that success is not easy to predict. What is equally clear is that Zhongsou's meteoric rise so far puts it at the forefront of the contenders.