INTERNET: Baidu Eyes Middle East, WeChat Flops In US

Bottom line: Baidu’s approach of targeting developing markets like Brazil and now the Middle East looks smart due to similarities with China and fewer rivals, while Tencent’s focus on the US looks dubious due to stiff competition.

Internet names in different global approaches

Having become some of  the world’s most valuable online companies over the last few years, China’s big Internet names are now looking globally to maintain the kind of growth they’ll need to justify their sky-high valuations. All are trying a number of strategies, but 2 broadly defined camps are emerging: one targeting developing markets like the BRICS, which are less lucrative and more fragmented, but also less competitive; and the other targeting developed markets like the US and Japan that can be very rewarding but are also extremely competitive.

Search leader Baidu (Nasdaq: BIDU) is squarely in the developing market camp, with search operations in Brazil and Thailand, and now new signs it is targeting the Middle East for its next overseas expansion. Tencent (HKEx: 700) appears to be the latter camp, following a high profile entry for its WeChat service into the US last year that now appears to have ended as a very expensive flop. Alibaba (NYSE: BABA) appears to be trying both options, though we have yet to hear of any major spending on any campaigns besides a few small overseas acquisitions.

China’s major Internet firms have made huge profits off their home market, where many have benefited from government protection and also trumped global rivals by engaging in business practices like censorship, piracy and other acts that would be illegal or draw strong criticism in the west. But they have far worse track records outside the country, in no small part because they can’t engage in those practices and don’t get any favorable treatment by local governments. Baidu and Alibaba both chose Japan for their first overseas expansion nearly a decade ago, and each failed miserably despite considerable investment of time and money.

Acknowledging they may need help in their global expansion, the trio and other globally-minded peers have made a few overseas acquisitions that have received widespread attention. But on a far lower-key level, the group have also hired outside companies that get paid to popularize their software in overseas markets. I recently met with the China manager of one such firm, Yuval Reisman of Israel’s IronSource, whose clients include Baidu and Tencent, which are both spending hundreds of millions of dollars to get their software installed on the smartphones and desktop PCs of overseas users.

Reisman disclosed that his company has helped Baidu sign up more than 100 million users for its browsers, homepage and other software over the last 3 years, accounting for more than half of the search engine’s overseas user acquisitions. More than half of that has come in Brazil, and Thailand and Southeast Asia are also well represented. But most intriguing was word that Baidu has also begun targeting the Middle East with Arabic-language services and attempts to spread its software in the region. That hints that a formal search engine launch for the area could be coming soon.

Then there’s Tencent, which only buys IronSource services indirectly, leading Reisman to admit that most of what he knows about the company is industry gossip. Tencent itself confirmed its US expansion plans for WeChat last year, but never gave more details. But according to the industry gossip, the company spent a massive $300 million on the drive, which has now been shelved after failing to gain much traction. The latest word is that Tencent will try again soon with a new gaming app targeted at global users, meaning the chances of seeing WeChat rise in the US or other western markets looks unlikely for the foreseeable future.

Lastly I should give quick mention to the struggling Qihoo (NYSE: QIHU), which has launched its own aggressive spending campaign to spread its core security software to the US. Qihoo announced last week that its global user base recently topped 100 million, and Reisman revealed that Baidu has also recently begun aggressively promoting its own rival security software in the US.

At the end of the day, these companies are all realizing the importance of expanding globally and are taking the necessary steps to reach that goal. I personally like the Baidu approach of focusing more on developing markets where there’s less competition and business environments are more similar to China’s. Tencent’s US flop shows that western markets will be tough, and even early successes like Qihoo’s could run into problems after many of these compaines’ dubious business practices and problems with their products are exposed.

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