Power split may hamper China market

Google founders Sergey Brin and Larry Page conquered the US internet industry by forming a triumvirate with chief executive officer Eric Schmidt.

Sharing power may not work in the world's biggest market: China.

The owner of the world's most popular internet-search engine last week named two people to replace Kai-Fu Lee, who resigned as president of its China operations to run a US$115 million ($165 million) venture capital firm.

Boon-Lock Yeo will oversee engineering and John Liu sales.

The split leadership model that Mountain View, California-based Google ended in China only three years ago may slow decision-making in the largest online market by users, analysts including Jiao Jie said.

That could hamper efforts to catch Beijing-based market leader Baidu and handle a government called the world's most aggressive censor.

"Business conditions in China favour having one, well-known person running a company," said Jiao, who covers the internet market for Beijing-based research firm BDA China.

"Change happens very fast in the Chinese internet market. Having two or three people making decisions can lead to trouble."

Lee, 47, leaves after four years of jostling with a government that accused Google of spreading pornography and blocked some services, including its YouTube site. Lee declined a four-year extension offer, according to an entry on his Sina.com web log.

Lee left to pursue his new project, Innovation Works, and not because of China's recent criticism or pressure from Google headquarters, he wrote.

"I view China as a very tough market because of the government and the way they participate with the companies," said Clayton Moran, an analyst at Benchmark in Boca Raton, Florida, which advises holding Google shares.

Herdict.org, a project of Harvard University's Berkman Centre for internet & Society, estimates YouTube and Facebook were among 70 sites blocked in China during the past week.

Dividing company leadership between engineering and sales was comparable to practices worldwide, said John Pinette, a Google spokesman in Hong Kong.

That structure didn't work in December 2006, when Johnny Chou resigned after sharing duties with Lee for about a year. Sharing power also didn't work at Sina, China's biggest web portal, where the stock price fell 35 per cent and there was a hostile takeover attempt during the 2-year shared reign of Duan Yongji and Daniel Chiang.

"Kai-Fu Lee has a very high standing in China's internet industry, and the combination between him and Google had seemed ideal," said Steven Chang, chief executive officer at Shanghai-based Optimedia, which buys advertising from Google and Baidu.

Google recruited Lee in July 2005 from Microsoft, prompting the world's biggest software maker to sue on grounds the job violated Lee's non-compete agreement. The sides reached an undisclosed settlement.

Yeo was director of Google's engineering office in Shanghai and Liu was president of Seoul-based SK Telecom's China operations for six years before joining Google.

The pair will try to build on Lee's progress of almost doubling Google's share of China's paid-search market to about 30 per cent. Baidu's share is about 60 per cent, according to Beijing-based researcher Analysys International. China's estimated 338 million internet users account for only about a quarter of the population.

Yeo and Liu said Google's strategy would not change.

"We at Google China still have the mission to keep innovating for our customers and users, to have the best product and best service," Yeo said.

China was Google's most important market outside the US, said Allen Wang, who left Google in 2006 after serving as chief marketing officer for the Asia Pacific division.

"They've done okay out there, but there's definitely room for improvement," said Pat Becker, chief investment officer at Portland, Oregon-based Becker Capital Management. "It was always going to be difficult to replicate the dominance they have in the US and Europe."

Google's focus on technology development boosted the appeal of its paid-search services to higher-end advertisers in China, Chang said. Baidu focused on the mainstream market, he said.

Google handles about 65 per cent of internet-search queries in the US, more than triple that of runner-up Yahoo!, according to July statistics from researcher ComScore.

Robin Li, Baidu's co-founder and chairman, is the richest person in China's internet industry with a wealth of US$2.4 billion, according to the 2008 Hurun Rich List.

- BLOOMBERG