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Baidu also offers an appealing product to advertisers that Google doesn’t: paid search placement, or the selling of search engine results for particular keywords to the highest bidder.

In a Baidu search on the word “Beijing,” for example, the top four results appear to be paid links to travel agents and other businesses. These links are indistinguishable from the normal, unpaid results on Baidu. Chinese Web surfers don’t seem to mind; indeed, paid placement is the primary source of Baidu’s revenues. But it’s a strategy Google has adamantly refused to consider.

Finally, Internet companies operating in China are more accustomed than Western firms to dealing with censorship. As has been reported widely in the global press, politically sensitive keywords are banned on Chinese search engines. Searching for “Tiananmen” on Google’s Chinese edition, for instance, brings up a few Web pages mentioning the Chinese government’s infamous crackdown in that Beijing square in 1989. On Baidu, those sites simply don’t appear.

Savvy Chinese Internet users, who seem more focused on business than politics, simply work around this censorship, and Baidu’s practices “will not have a serious impact on public opinion,” in Sun’s words. But when Western companies operating websites in China bow to the same government policies, they catch flak back home. (U.S. bloggers criticized Microsoft earlier this summer, for example, for blocking banned words in the titles of blogs created by Chinese users of its MSN Spaces service.)

Foreign companies like Google need to adapt to local conditions if they are to have any chance of success in China, says Caroline Straathof, senior director of Investor Relations and Corporate Communications at the popular Chinese Internet portal Sohu. “Spending a lot of money is not the solution,” Straathof says.

Google has begun to learn: in recent months, says Sun, it has imitated Baidu by signing up several local distributors who handle ad sales on commission, and can accept payment from customers without credit cards. “I think those companies will develop Google’s business in China very quickly,” says Sun. “So I believe Google will gain very big revenue share within the next few quarters.” If it wants to expand even faster, Sun notes, there’s always one more option: use some of its billions to buy the rest of Baidu.

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