Alibaba has chosen Google China as its main advertising platform partner for its online advertising service Alimama over Baidu.
Alimama provides roughly the same advertising campaign targeting and service delivery capabilities to advertisers as Google’s Adword service worldwide, with the biggest difference being that Alimama is targeted at the Chinese domestic audience.
Alibaba had been in secret discussions with both Google China and Baidu. The discussions with Baidu broke down for undisclosed reasons, and soon after, Alibaba announced its partnership with Google. This agreement is important because Alibaba is the owner of the largest B2B platform, Alibaba.com, and also China’s leading online auction firm, Taobao. Taobao has successfully defended its online auction presence in China, forcing eBay China to hand over its operations to Tom Online while it rethinks its China strategy.
This is a major blow for Baidu since Alibaba has the capability to spend a significant amount of revenue targeting search users and publishing networks with ads. In the US, eBay is one of Google’s biggest Adword’s clients, but the relationship has recently become rocky because the two companie’s have competing online payment systems. While online payment systems are not the most sexy online products, they are highly profitable since they usually operate on a commission system, taking a cut of the total transaction, instead of a flat fee.
Google has introduced Google Checkout in China, and Alibaba has its own payment system, Alipay. It is likely that in the advertising agreement both payment options will be offered to campaign buyers. For observers, it will be interesting to note whether Google Checkout or Alipay will achieve “preferred service provider” in future revs of the service. This will obviously be a source of major competition between Google China and Alibaba even though they are cooperating on this advertising solution.
Baidu has 62% search marketshare in China and is the market leader, while Google has only 20%. Baidu, even though it is widely seen as China’s native son in the search market, has significant problems which I have discussed at some length in an earlier article on the Chinese advertising market.
Baidu’s single greatest challenge is coming clean about click fraud. A major reason for its inability to tackle the problem is that as a public company, any attempt to clean up the problem would hit its earnings, and may even lead to litigation about past performance. It would naturally avoid coming clean about the issue and push it off to future management to tackle. The trouble with this approach is that click fraud becomes a slow rot, and advertising clients will choose to shift their adspend to competing search engines which have more effective anti-click fraud mechanisms in place.
Click fraud has become a major drag on the development of the Chinese online advertising market, which is poised to pass 90 billion yuan this year.
This may well be the background to Alibaba’s decision to partner with Google China. Alibaba is planning for an IPO listing later this year.