Better late than never

Microsoft/Baidu: Microsoft 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, 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 per cent 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 the son of former Chinese president Jiang Zemin. But local competitors have been aggressive. Tencent now controls more than 70 per cent 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 per cent stake, possibly to Nasdaq-listed second-tier operator NetEase.

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 per cent 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.