The number of competitors and the major money now funding China’s Internet search engine war may seem out of proportion to the current size of the market. Shanghai-based consultancy iResearch puts China’s paid search market at about $151 million for 2004; Piper Jaffray estimates the size at only $134 million. Compare that to the $2.32-billion U.S. paid search market in the first half of 2005, according to the Interactive Advertising Bureau.

But there’s no doubting search’s potential in China. iResearch estimates that the Chinese paid search market will grow by 81 percent in 2005 and a further 60 percent in 2006 to pass $690 million by 2007; Piper Jaffray reckons the market will pass $1 billion by 2010. Such sanguine estimates aren’t at all unwarranted. Every month, the ranks of China’s Internet users swell by about 1.5 million—more than the entire population of Idaho. The China Internet and Network Information Center (CNNIC) officially estimates the number of Chinese netizens at 103 million as of June 30, 2005. That number still represents less than 8 percent of China’s population. By comparison, the estimated penetration in the United States, with its 135 million Internet users, is about 67 percent.

The ad client side is also a story of enormous untapped potential. With e-commerce still very much in its infancy in China, the overwhelming majority of paid search customers are small- and medium-sized businesses (SMBs) that may have simple web sites but typically lack the ability to transact sales online. China has, by some counts, as many as 40 million SMBs. For a small but growing number of them, performance-based Internet search advertising is a reasonably inexpensive way to acquire customers.

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