Google's China troubles not so great for Baidu?

01/19/2010 2:30 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Troubles at Baidu (BIDU)?

Traders jumped into shares of  Baidu last week on the theory that Google’s (GOOG) troubles in China—and the likely shutdown of the company’s Chinese search engine—would be good news for the biggest domestic search company.

Today they seem to be having second thoughts. Baidu shares were down almost 8%--$36.68 a share—at 11:15 in New York.

The catalyst seems to be the departure of Baidu’s chief technology officer, Li Yinan, for personal reasons. (Some analysts have Li gong to China Mobile (CHL).) That resignation, announced on January 18 is the second major departure at Baidu recently. On January 8 the company announced the resignation of Peng Ye, the company’s chief operating officer.

The two departures have drawn attention to the likelihood that problems with the company’s new online marketing system Phoenix Nest will limit Baidu’s ability to pick up share from Google in China. (Google recently had 35.6% of China’s $1.1 billion online search market.)

In October Baidu warned that fourth quarter earnings would drop by 7% due to customer reluctance to use Phoenix Nest. That system was introduced in April in response to criticism that Baidu did not clearly separate paid for unpaid search listings. One complaint is that Baidu’s keyword prices are already too high.

Baidu’s problems with Phoenix Nest come at a good time for other Chinese search companies looking to pick up share—and visibility—if Google leaves the domestic Chinese market. A big winner might be Alibaba (ALBCF), which is planning to launch its own search engine on its consumer e-commerce site Taobao.  Alibaba’s shares are up about 1% today as of 11:15 in New York.

Full disclosure: I don’t own shares of any company mentioned in this post in my personal portfolio.

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