UC’s next target is the U.S., where the company released localized Android and iOS versions this past week, and plans to open up a Silicon Valley office later this year. (It has already made inroads into India, where it has 20 percent share and is close to knocking off market leader Opera, execs said.)

UCWeb's Roy Rong and Yu Yongfu visit AllThingsD.

UC Browser is more than a just dumb container for Web sites; in China, the browser includes its own virtual currency accounts, identity system, social network and navigation services. In a way, it’s more like a mobile-only Facebook platform than the pure Chrome or Safari browsers.

Plus, UC browser is quite fast, because the company maintains local data centers from where it compresses Web sites and sends them to phones. Opera Mini and Amazon’s Kindle Fire Silk browser use similar techniques.

Bridging to the U.S. market won’t necessarily be easy, but UC’s design and experience across the spectrum of low- to high-end phones could be instructive.

CEO Yu Yongfu — who’s on a grand tour of Silicon Valley this week — emphasized that while his company started doing all this in 2004, the U.S. smartphone market only launched with the iPhone in 2007.

And beyond that three-year lead, China is supposed to oust the U.S. as the world’s biggest smartphone market this year.

Yu said he thinks he understands how to deal with the limitations of mobile — small screen size, reduced bandwidth, limited input, short battery life and some eight different operating systems — better than just about anyone.

Still, it’s not clear that the pillars of the UC Web strategy — compressing sites to speed up page loads, and bundling in services and shortcuts — will go over well in the U.S. smartphone market, where we have tended to like our browsers to just show Web pages for us, while leaving heavier lifting to dedicated apps.

UC Browser has 200 million active monthly users, with 50 million of them on Android and the rest spread across other platforms. It gets about a quarter of its users from deals to be preinstalled on phones, said CFO Roy Rong.

The new U.S. version of UC Browser for iPhone

Like other browsers, UC receives revenue through search referral agreements (in China, the default is Baidu; in the U.S., it’s Google). The UC app also includes paid links, display ads, and virtual goods sold in the Flash games it licenses for users. It has its own “app store,” and helps users save bookmarks to HTML5 apps on its home screen. It’s almost like a mobile Web OS.

Rong and Yu said they couldn’t think of any examples of Chinese Internet companies with significant usage in the U.S., so they are hoping to blaze that trail.

To get things started, they rented data centers in Los Angeles and Dallas, signed an agreement to bundle Evernote in UC Browser to help it get distribution in China and vice versa (and plan to do so with other apps), and tweaked the browser’s interface to be more spacious and empty.

For whatever reason, people in China seem to prefer more clutter, Rong said.

Baidu, which generates almost all its revenue from search advertising, has posted double-digit earnings growth over the past year on soaring ad sales. The company has solidified its market-leading position in China after U.S.-based rival Google Inc. shifted its local search traffic to Hong Kong in 2010 following a disagreement with Chinese officials over online censorship.

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The top four most powerful people are politicians, including Barack Obama in the top spot. At No. 5 is Bill Gates, who ranks high for his philanthropic role as co-chair of the Bill & Melinda Gates Foundation.

Some of the other tech leaders and their rankings:

5. Bill Gates, co-chair, Bill & Melinda Gates Foundation.

9. Mark Zuckerberg, founder, Facebook.

30. Sergey Brin and Larry Page, co-founders, Google.

40. Jeff Bezos, CEO, Amazon.

42. Robin Li, CEO, Baidu.

44. Li Ka-shing, chairman, Hutchinson Wampoa.

58. Tim Cook, CEO, Apple.

60. Masayoshi Son, CEO, Softbank.

10:16 am: Walt takes the stage to introduce Peter Kafka, who will be interviewing Ma for the absent Kara Swisher today.

Peter Kafka: It seems like every time you’re on stage with us, we have to talk about Yahoo. So we may as well get that out of the way right away. We heard from Jerry Yang. What’s the latest? We know that you’ve expressed interest in buying all or part or some of Yahoo over the summer; in the past you’ve been trying to sort of at least get Yahoo out of Alibaba. So where do things stand right now?

Jack Ma: I think we still have not changed our mind, and we keep our strong interest on the Yahoo. The things that we are waiting for the Yahoo board, and especially their independent directors, to tell us what exactly they want to do.

PK: What do you think they want to do?

JM: I don’t know. [laughter] I’m waiting.

PK: And what have you proposed to them?

PK:JM: Well, I think not us, I think a lot of people have already talked to Yahoo for years. And I think we are, we have to know exactly what their — I know they have a lot of options, but you have to take one option first, what they want to do.

PK: Yeah, Jerry Yang said they have a lot of options, a lot of things on the table.

JM: Okay, I did not know that.

PK: They’re going to make one decision.

JM: Yeah, they have to make one decision.

PK: So, in the past you said, “I’d like to extract myself from Yahoo,” and I think you surprised some people this summer at Stanford when you said, “I would like to buy all of Yahoo.” Is that still what you would like to do if you had that option?

JM: Yes.

PK: You’d like to buy the entire company … Alibaba –

JM: Yeah, even though, as I said, if the, their board say … Yahoo, I’m interested. If our piece. We are interested, but just let us know what they want to do. [laughter]

PK: I understand why you’d want to buy back Yahoo’s stake in your company.

JM: Yeah.

PK: Why would you want to own the entirety of Yahoo?

JM: Well, I think Yahoo is so important to us, and we are also very important to Yahoo. And Yahoo is also so important to the industry. And we, you know, we’ve been thinking about that for a long time, we talked to Yahoo for a long time, and of course we know there is something that we can add value to Yahoo.

PK: Why are they important to the industry? Why — and how could you add value?

JM: Well, Yahoo, without Yahoo probably I will not start my Internet business, ’cause Yahoo, when I started business, Yahoo was my idol. And I don’t want my idol to fall down, and it’s so important to us, ’cause we are partners for so many years. And you don’t want to see your partners in trouble. So, if you can do anything to help, just help. If they don’t want the help, then don’t help them.

PK: But you guys have said recently, several times, that really that Yahoo doesn’t add a lot of value to your operations here. So I don’t want to belabor this, but I would assume that the main value to Yahoo would be to sort of get them out of your hair. But if you had to run the U.S. part of the company, and Jerry was on earlier and said the idea is to become the premier digital media company, is that what you would do with the Yahoo U.S. operations, and operations outside of China?

JM: I never tried to say, “Well, we want, I want the team, I want the market to know what exactly the company should do.” The people should know where they want to do, and make this thing come out and happen. Otherwise, this thing will go nowhere.

PK: Well, you said the people, you mean the management?

JM: I mean the management, and the people — I mean, when I say people in the company it’s about my colleagues. We know this is what we believe, if it is our belief, make it happen.

PK: So, if you were in charge of all of Yahoo today or tomorrow, what would you do? It’s your management.

JM: I think Yahoo is a great company, with great assets. And also, I think there’s so many great CEOs in U.S. that can run this business well.

PK: So you would bring in new management?

JM: Yeah. I don’t, I don’t — I think it’s a big challenge for Chinese people to go to the U.S. and run an American company. But we could definitely help.

PK: And you have a shortlist of people you’d like to hire? You want to tell us who you’d put in charge? [laughter]

JM: That’s, that’s too early to discuss about that.

PK: Okay, I tried.

JM: Of course, we will be thinking about that now.

PK: And I think you can answer this pretty quickly, but in the past, it’s been quite obvious that if you were going to buy all of Yahoo, you’d need financing, you’d need partners. And then there was a weird story that came out earlier this week, and it was a translation issue perhaps, but it said, “Jack Ma says ‘I have $20 billion, I can buy all of Yahoo by myself.’”

JM: Yeah.

PK: Am I missing something?

JM: I absolutely don’t have $20 billion. [laughter] But I’d love to, right? I think money’s, finance is not, never a problem. Today the financial market is no good, but the money is there. We’ve been working with Yahoo for years, and trying to buy some back and work something out, so we never think that the financial is a problem. The problem is what they want to do.

PK: Jerry was here, did you talk to him earlier? Did you ask him this yourself [laughter]

JM: No, I did not meet him today, and I just arrive last night for this event and go back.

PK: I’ve got to say, one of the cool things about an event like this is backstage — you can’t see this, but there’s lots of people hovering back. And you just talked to Jack Dorsey, from Square and Twitter, I think that was the first time you guys had met.

JM:: Yeah.

PK: Do you think there’s a business relationship between your company and either Twitter or Square, going forward?

JM: I think there will be a lot of business going on with our company with the U.S. economy — I see when I look at so many American amazing Internet companies. I think there are so many things that we can work together. So many. If, especially when we go to the States, we have to find partners, instead of finding competitors. And when they come to China, they need partners. And we are one of the best partners people can find.

PK: A lot of U.S. companies have come here with mixed records: eBay, sort of a competitor of yours, came, basically left; Google left for different reasons. Why do you think some of the big Internet companies have struggled, the big U.S. Internet companies have struggled in China?

JM: I think any company go to any nation, you need to have this struggling. The very important thing you should have is patience. And instead of looking at your own strategy about the … you should focusing on the customers in the local market. Serve them well, just like any entrepreneur, any business going there. For example, when we start Alibaba, I never thought this thing, and I believed this thing would never succeed within first five years. Takes about at least eight, 10 years. When I start a … I say, “Let’s wait ten years later, not now.” So if you come to China, or any big Internet companies, think about five, 10 years later what’s going to happen, instead of next year, five months later what is going to happen.

PK: You started your first Internet company in 1995, when most people weren’t starting Internet companies in any part of the world, with the exception of a few in the U.S.

JM: Yeah.

PK: Were you looking out five, 10, 15 years ahead then? Or were you just marveling at the fact that you could use Prodigy to dial up to the Internet?

Jack: Well, yeah, I start — You know, people know about Alibaba knew about … Alibaba know about today what we are doing. But the people did not know our China pages and our, the … Web sites, all filled. They only see some good side and they don’t want to see the bad sides. And when they see the bad sides, they forget about the good sides. So, I think it’s a long, when we started, we thought it would, we probably would be successful in three years and fail. And then, we start Alibaba, we know, “Okay, it takes long time.” When we start Alibaba — Taobao, we say, it’s a long time. When started Ali-Paint we know it a long time. So whatever we do today, everything, and I think as the CEO, everything I did, the decision I made, I asked myself, asked a team, “What’s this thing going to happen in five years?” And 10 years? Not in five months. I don’t want to see five months.

PK: And with the pace of change in any part of the world, but especially with the Internet, especially with Asia, where all these things are growing so fast, is it realistic to say, “I’m going to try to predict what the world will look like in five years?”

JM: Absolutely. I think when everybody’s talking about a fast and quick, you should think about slow. When everybody think about slow, you know, we have a long time, let’s move fast. This, this is always the right way to do business. Well, I did that, and now we, and everybody, everybody’s criticize this, and so wait a minute, let’s think about it. Everybody think this is a great, okay, be careful because you may not have the chance.

PK: Counterintuitive thinking, it works for a lot of people. One of, one of the themes that I, Walt brought up with Jerry, and I think he’ll, we’ll bring up throughout the conference, is this notion that a lot of what we’re seeing in China from the technology community, or what we could charitably call imitations of things we’ve seen in the U.S. Most of the stuff here comes from the U.S., and in iterates, to put it politely. First of all, do you agree with that, with that description?

JM: Mmm. No, I don’t really. I think, you know, the na–, I respect intellectual properties, I respect the great ideas, innovation, but these things, if nobody use it, if nobody devel–, if nobody innovate on innovations, that’s a big problem. You know, the IM was AOL first — I think the ICQ first made it, but now … make it even better. Right? And Twitter did a great job, and Weibo in China, also did a great job. And China invented the … but the USA and Western country made it better. The campus, everything, you know. The war is about learning.

PK: So you’re not spending time thinking, “How can I create the most innovative possible company,” you wanted to, that’s not keeping up enough.

Jack: I never think about “How can I make this company most innovative?” only think about how can I make my customer much happier and comfortable and last long. I don’t care whether people call you, “Jack you’re, your innovative company, or internet techno–” We are service company. Our job is using Internet as a tool to serve the customers, instead of, “Oh, we are innovative company.”

PK: And let’s be clear about who your customers are, ’cause it — some people might be confused about it. It’s generally not a consumer, right? You’re generally a B2B play.

JM: Yeah, we started from B2B play, we just focus a small business. My customer, as I said, my belief is my customers always be small business entrepreneurs. ‘Cause I’ve been working as a start-up entrepreneur for 15 years. And I know how tough it is, how difficult it is. Somebody, if somebody got it, help them, it’s not, Jack Ma can’t help them, it’s the Alibaba people useI internet that can help the small business. So, my customer is small business, entrepreneurs, and …

PK: [interposing] Small-business entrepreneurs who want to sell something, you enable that.

JM:: Sell something on the Internet.

PK: Like these shoes.

JM: Oh, yeah, yeah, this the shoe I bought on Taobao, because, oh, some, some lady in the countryside, they are making shoes and selling online, and I think if I buy it for $20-$30 … and they can have a job and they have fun, and I feel very comfortable. I think I’m getting older, love this kind of shoes. It’s very comfortable.

PK: They look comfortable. I might get some for the flight back, I don’t want to have a Kara Swisher incident. [laughter] But you guys just raised prices for some of your merchants, and that inspired a big protest. And you didn’t really back down. You didn’t change your mind. When customers or people who say that they’re customers, tell you they’re unhappy with the way the company is run, and you don’t change your mind, you say, “I’m going to go ahead,” what should we take away from that?

Jack: Yeah, the the past 10, 10 days was the, one of the most painful days for me, in my life. And when I fly back from the States to China to solve the problem, I listened to music, there’s a sunset, the people hurt you most are the people you love most. And I love the … I never thought about that. Alibaba never think about raising, you know, for the, raising the price and collecting more money from the poor SMEs. The purpose for doing that is because we want against the fake products, intellectual properties.

PK: So let’s explain exactly what you did do.

JM: Okay. We have, for Taobao’s side, we have one billion proud listings. And we have over 70 million unique visitors every day, and we are probably the largest e-commerce site, if not in the world, we’re at least in Asia. But there are a lot of fake products, intellectual property issues, and so we got to solve this problem. If we don’t solve the problem, Taobao will never last long. Three years, five years, we’re in trouble, ’cause we have to respect these things. So we said, “If anybody sell these kind of things, if you sell one, we find out, we’ll pay fine for five times.” And take the businesses seriously. And anybody come to Timo, which is focus of big B2C, all this big business –

PK: It’s the equivalent of a mall, an online mall.

JM: It’s a mall. We have 50,000 business selling these things on our site. So we said, “Anybody, if you’re on Timo, no intellectual property issues, no fake products,” all those were serious punished. And this message turned out to be we raised 10 times more fee. Because, thanks to the Internet time, you know, people don’t believe for the, what you want to do, people believe the rumors.

PK: You blaming that on the Internet or just human nature? The answer is human nature. [laughter]

JM: I think human nature plus the Internet [laughter] growth very fast.

PK: We’ll do our best to get things accurate. At least this is being recorded, so people can always check, check back. But you still had a lot of people protesting, and you didn’t back down. You said, “Well, we’ll try to make this more palatable for you, we’ll create funds that will make this easier for some merchants.” But it didn’t cause you to rethink your strategy?

JM: No, I, I’ve side, I announced firmly and clearly that we will never step one back from the intellectual property problems. And, and these fake products, and these is trust problem. So, but, helping small business entrepreneurs, we will do it. And the way, how we communicate, we are reviewing ourselves. So, that is why we invest. The problem, this problem can never be solved by Alibaba alone. This problem can never be solved within three years. It’s a long one, this is why I’m getting, oh, terrible days. But you know, this is why they probably decide to need us.

PK: I think if you buy Yahoo, there’ll probably be more difficult days ahead.

JM: More problems, oh, yeah, oh, yes. [laughs] Oh, yeah.

PK: But you’re okay with that.

JM: But you know, you know, if life is so short, if you really do, can do something, that help others and meanwhile you enjoy it, you know, enjoy. The other side is a pain. It’s your own choice. If you pick it up, go ahead. My friend said, if you pick up the way go to paradise, go ahead. If you pick up the way go to the hell, go ahead. [laughter]

PK: What about a nice middle ground? [laughter]

JM: No, you have two options, you have to pick up one. [laughter]

PK: Back to the U.S. for a minute. You bought a couple companies in the U.S., some of the other big Chinese Internet companies, Ten Cent in particular, have bought several more. Is that something that interests you? Do you want to acquire more companies within the U.S., or are those sort of one-off purchases?

JM: Well, I think we are interested in partnering more, and we are interested in invest — I think U.S. in need more Chinese investment, foreign investment. And they should accept it, because it’s good for USA, it’s good for the others. And I don’t want to come, to go to U.S. or go to Europe and just to go there fighting. We want to go there partnering.

PK: And the reason it’s important for the U.S. to take in Chinese investment? Spell that out for us.

JM: They need jobs. They need innovation from the others. Yeah, they, I think it’s great, U.S. have so many great innovation, like Apple, this and that. They also need a tiny SME innovations, which we can bring.

PK: You don’t think eBay’s going to take care of that on their own?

JM: Well, I think that eBay should take it up themselves, you know, they have great ideas and they, they develop it. Does not mean that this market should be eBay alone. And they come to China, I mean, anybody can do.

PK: So, you sort of own this commerce market in China.

Jack: Well, no, we are contribution.

PK: You dominate it. [laughter]

Jack: Yeah. I help.

PK: It’s a good thing. And the other big Chinese Internet companies all do things that are separate from that, but it seems like you’re starting to rub up against each other, along the side. Baidu is the dominant search engine, you’ve created your own search product. And you said something to the effect of, one of the reasons we’re doing a search engine is we want to sort of make it difficult for the folks at Baidu to sleep at night. Do you think you’ll become more direct competitors over time?

JM: Yeah. Yeah, absolutely, because it’s good for markets, it’s good for industry. It is good for — we are, we’ve been separating Taobao three, three companies, in June, you know, because Taobao’s getting bigger, so I separate it in three. And the other, one of the reason is that I want, that make, running big company like a small company, make us small and the industry will be bigger. If we are big, industry was small. So, separate to three, and I said, well, 10 years later, any small piece of the three pots bigger than the others, let’s separate the three again. So, the competition, I don’t really focus on competition a lot. Competition is just, to me, is a dessert, it is a fun part of the business.

PK: But inevitably, like the bigger you get, and the bigger your people who aren’t competitors but might be, get, that stuff’s going to overlap. I mean, the analogy in the U.S. would be Apple and Google weren’t competing for a long time; now they are. Amazon is, in theory, a separate business from Apple and Google, but there’s a lot of overlap there, on and on and on. Do you think that’s inevitable in China?

JM: Absolutely. This is a market effect. You have to face it, you have to challenge it. And e-commerce is … Taobao is big, but compared to the tomorrow, the future, e-commerce, it is pretty small. It is pretty small. It is just a beginning. And I think it’s not — one thing I feel very different, because not only may, not only China, especially in the U.S., a lot of people that do their business, think first of competition. And I think the first is the customer, how big the customer base. And then think about, when you get tight, let’s find some competitors.

PK: So, don’t go find a market where there’s no competitors, find a market where there are a lot of customers and …

Jack: [interposing] Exactly. When you get bored, find the competitors. [laughter]

PK: [laughs]

Jack: Yeah, it’s true.

PK: You’re not bored yet.

Jack: Well, no. I’m kind of busy, I have to go back to business, you know?

PK: Let me just ask you a couple philosophical questions. Someone asked you a question, I’ve seen it on some previous interview, about donating money to charity and doing philanthropy. And your answer, in short, was, “I’m not that interested in that because what I think, I think the best use for my money is to build companies and to create jobs.” Do you ever think about reconsidering that, and thinking, “Well, maybe I could do something with these resources”?

JM: Well, I never said that I do not donate money to something. I think we probably contribute, I don’t know about the other Internet, Chinese Internet, we give 0.3 percent of our revenues to … to the environment protection.

PK: Right.

JM: Right? And we, I think, you know, I think together with my colleagues, we prob–, I probably spent a lot of money and efforts on doing this thing. Because it’s my private thing, I just don’t want to tell in the public it’s a private thing. I don’t want to say, “Well, I’ve donated money here.” Because for a business, I agree with … had a business, we have to bury our social responsibility into our business model. Instead of, well, “I’m making some money here by cheating the others,” and then donate money. I hate that. The business model itself should be, create value, and be good to the society.

PK: But, very often what a customer wants, you’re trying to serve the customer, may not be good for, say, the environment, right, the two can be–

Jack: And then don’t do it.

PK: –in natural conflict. So, who, what wins, if there’s a conflict between what a customer wants and what the effect might be on the environment?

JM: I think the choice is very clear. If it is hurt the environment, if it is no good for the society, just don’t do it. No matter how much money–

PK: Even if the customer says, “Give me more of that.”

JM: Well–

PK: “Take down that tree, dig up that hole.”

JM: Yeah, exactly, just … did last week, people say, “I want in on these kind of fake products,” intellectual properties. I say, “Well, kill me or put me in the prison, this is my decision.” I have principles.

PK: Is it realistic to have companies self-regulate themselves instead of the government doing it? I mean, we have this debate in the U.S. constantly, we go back and forth. Right now the pendulum is sort of tilting I think towards self-regulation.

JM: Yeah, where, whether there’s a government regulate or yourself, it’s your own belief. If you believe it is right, you don’t need other people to discipline you. And it’s better for the market, you know, company’s a market product. What I believe is that this is something you’re doing this good for the others, just do it. Right? Don’t wait for the government come. And if they can come, sometimes things get messed up.

PK: Another government question. In the earlier interview with Yahoo, Rose said, I think it was Jerry, perhaps, it was Jerry, said, “It’s an open question about whether or not censorship is going to ultimately stifle real entrepreneurial spirit and drive and creativity in China.” And it may be that enough government restriction will make it difficult for entrepreneurs to really succeed on the level we’ve seen in the U.S. and other countries. Do you agree with that?

JM: Well, it depends on which angle you see. I think censorship is, yeah, it’s issue, but it’s not that big issue. Let’s look at the good side of the Internet, let’s look at the good things you can do. This is always my optimistic view. If you focus on one side, for example, censors were so serious you got tied up about that, and we started developing the others. And I think Chinese government is sometime, you know, they are getting, they are getting more and more open. And then in some period, they’re getting close. Which I think it’s very natural for people like me, sometimes very happy, sometimes not happy. You know? Confidence … Tai Chi …

PK: [interposing] Do you think they inevitably, do you think they inevitably grow more open as commerce grows, as the country gets bigger? Or do you think they could still pull back?

JM: Yeah, this is, this is what I’m doing. I think the e-commerce, the commerce and trading, trading can help people understand each other, make full use of the Internet by creating value for the others. And then the more they do it, if you’re accountable, they release. So, but, I think it’s like in the company, when I look at my colleagues, my partners, my assistant. If you look at the bad side of this guy, you can never make things forward. Well, his best side is my, this is why I, they need me. Because Jack Ma’s shut … that’s why Jack Ma needs partners. So I think we try sometimes, you know, censorship, let’s see as a business what’s the opportunity we can do? And then, make them comfortable, things will get better. I hate to criticize people, I mean.

PK: But you will.

Jack: Yeah, sometimes get just annoyed, and I mean, then I criticize myself and then change, you know, this is life.

PK: So we started this interview 25 minutes ago, I asked you about Yahoo, this situation changes a lot — has anything changed in the last 25 minutes? Are you going to buy Yahoo [laughter]

Jack: No.

PK: Okay.

JM: No. I said we are waiting for answers. And there are so many people talking, and talking to us. And we will start to talk to them. Very, in the next few weeks. Because if we don’t do it, it’s no good for all of us.

PK: So if I ask you in a few weeks, I’ll get an answer.

Jack: I wish I could, it’s not on my side, it’s their side.

On to the audience Q&A …

Q Hi, I’m Justin Fung from HSBC. In your China 2.0 interview at Stanford, you mentioned that China’s going to go through many of the same challenges that the U.S. is going to go through in about three years. Can you go into a little bit more detail as to why you feel that’s going to happen in three years? What are the key issues that they’re driving at?

JM: Thank you. I’m not a financial columnist, but I just as a business guy, you have to smell what’s going on in the market. It’s instinct. And I think what’s happening to the U.S. today, and Europe, is going to happen in China, next three, five years. The problem, like of job problems, the problems like the economic structure problems, will all appear. So, the import/export problem, because the Asia — the USA economy and European economy, the China exporting, the problem is getting even worse, it’s getting worse. And the other thing is a domestic demand, we need take actions. And also in China called upgrade. Upgrading you have to pay the price. And I don’t see people are ready to pay the price yet. And these things are losing, and anything three years later, I think the past 30 years, for the first 10-some years, private sectors bump up the China economy. And next 10 years, in the international companies, multinational companies, half to China.

PK: Can you be clear about what you mean by upgrading? Who needs to upgrade? What are they upgrading?

JM: Well, China government it’s called upgrading, you know, and transforming called [Mandarin] upgrade whatever management or upgrade the industry. Upgrade, you have to pay the price. For example, I’m upgrading Taobao against these kind of intellectual properties. I got to pay price, I got 50,000 people demonstrate against me. But that’s the price you have to pay. If you don’t pay, come back to work, get bigger. So, this is the issue we are facing. We have to take the challenges. And I don’t see a lot of people ready to take challenge. They’re ready to talk, but don’t take challenge yet. So, if we don’t take challenge, three years later you will see what’s going on. So that’s my point: Let’s get ready for that, and jobs, as in small business, private sectors, they are going to be facing troubles. And we have to get ready for that. Thank you.

PK: In 2008, in retrospect, it’s easy to say you saw this coming, but you did see that there was going to be the credit collapse.

JM: Yeah.

PK: How are you feeling about the next six months to a year, nationally, internationally?

JM: Well, I don’t see there are any, for China. I’m pretty confidence in the next two years that, well, the problem will come in three, five years.

PK: And can you imagine what that precipitating event will be? What will trigger that problem?

JM: I don’t, I’m not fortune teller, just to say this thing is going to happen. And we got ready for it. If this thing, if we’re ready, that thing does not happen, everybody happy. For example, when we talk about the financial crisis, what’s the early beginning of year 2008, we find something wrong. So, I make the whole economy get ready for that.

PK: What was the signal to you that there was something wrong in 2008?

JM: Import/export is in problems. And people, for the forums, every forum I go, people talking about IPO, people talking about PE, people talking about profit margin, yet nobody talk about the value we created. People start greedy, people — everybody’s talking about how many, you know, times you can go, if you got to raise money and the IPO. So I know something wrong. People change. If everybody change that direction, this angle is in problem.

Q I’d like you, if you could talk about online currencies in China, their importance, and how you see the government attitude towards them as they grow.

JM: Okay. Honestly, I’m not, I may not be right, because few years ago when we talk about the online virtual money in the Alibaba internally, and I’m, I was strongly against it. Because I think if you are doing business in China, better believe IMB is the only currency. And if there anything that could probably get annoyed people or the government, just don’t do it, because there are so many ways you can do it. So, I was against it, and later that thing grows so fast. And I still think that Alibaba should not involve that. So that’s why Alipay the only currency for Alipay is IMB. Which, you know, we accept U.S. dollars, too. [laughter] But virtual money, I worry about that. I don’t — I just don’t want to have, like, 1,010 minutes of coins which I don’t know what I’m going to do. And the bigger that thing is, the government would take action. And they will. Any government will. I don’t know how, but I, I think they will. So, but based on the IMB, U.S. dollar, the pounds, I feel more comfortable on that. So, for example, why we did not do the online gaming? Because when, many years ago when everybody, any company, goes, “Let’s do the online gaming thing,” I know someday the government would take action where every kids are learning how to killing. [laughter] Something’s going to happen. Now it’s peaceful and quiet now, it’s much better. This is, this is, say, this is what I — when either you can make the too big or this become two bigger problems. Somebody got to involve it. So, I don’t know, I cannot answer the question, I just Alibaba does not have the intention of doing that, ’cause I worry about.

Q: Hi there, Richard Lai from Engadget here. Your company recently released Aliyun OS, which is a new mobile operating system. And last month you announced plans to release an English version, and even a tablet version in the near future. Can you talk about what benefits that will bring to the Western market, and even to Alibaba itself?

JM: I think, you know, a lot of companies are talking about cloud computing. And we take it very seriously because we have so much data. Datas from small business, datas from the consumers, and datas from Alipay transactions. And I think three years ago, we met internal, the strategic meeting, I sat. We don’t know how to make from the datas, but I believe datas will be so important to our small business, our consumers, and manufacture base. So, let’s, let’s invest money, then. We’re not sell, because of cloud computing, we are selling softwares; we’re not selling hardwares, we are selling services to these. So, this is our principle. And the, the OS for the, for the mobile phone, I think the next big wave, which we have to face the challenge is mobile Internet. We should make Internet mobilized. And how we can, how we can do that, China have like, I was told 60, 600 million mobile phones. And most of them are feature phones. And one thing struck me why I want to do — when people talk to me, they say, “Jack, we’re going to OS, we’re going to launch an OS.” I was shocked, “What, OS?!”

So complicated, how can we do that. Right? ‘Cause why Alibaba can do it? And these crazy guys working for, for one year, you know, our OS came out. It’s not beautiful, like any babies when they were born, it’s ugly looking. [laughter] But the mom always say, “Beautiful,” right? But takes time to make it beautiful. I said, “Wow, the baby’s there, let’s make this beautiful baby, baby beautiful.” But the thing that make me work on whether we will have the opportunity to do it, or the other company have, the opportunity to do it, China needs an operating system to lower the cost of mobiles. And I read one news, which I was touched, moved and I came back to talk to the CEO of Ali … We pay any price to move this industry up.

PK: You don’t think Google, Apple, people who are in the OS business, already spent a lot of years making that ugly baby prettier? You don’t think they can do this for you?

JM: Let ‘em do, let them do it. They should do it, like on eBay when they have 90 percent market share, I want to do it. The purpose I do it is different from eBay. And I think the market is so big. You know, I tell you the news, why I, the news I made full determination to do it. I read an article in the newspaper, there is a girl, 11 years old, her parents went to the city, as a, you know, as a city worker, and brought her, brought them together. She was 11 years old, the only things stay with her was three cats, seven chicken, in a lonely big house. And she wants to make phone call to her parents, but it’s too expensive, and it’s also so far away from where she live, in a village. So, I say, “Let’s make this mobile thing cheap. Make these girls can call their parents, brothers, at the cheapest prices. Second, when I see my daughter playing the iPad, I think all the girls should have this opportunity. And as whether we’ll make money or not, I don’t care, ’cause Alibaba, you know, we have so much cash, we need to be invested for the future. Let’s do it. So, this is what I believe.

Q: Does this also mean you’re also looking into maybe offering data service, as well?

JM:: Yeah.

Q: So, does that mean you’re looking into maybe entering that market as well?

JM: Yeah, at least if we’re not entering the market, we want promote, we want to encourage more people entering that market, making sure that the total cost of mobile going down, making sure China with the, with the managing factory capability, with innovation, with so many people today telling me, said, “Jack, you know, to make a Internet entrepreneur, this job is so difficult, because you guys are there.”

PK: So if you’re not going to get into wireless yourself, how do you encourage other people to do it and to bring the price down?

JM: Yeah, we are building up the infrastructure as always. We are not making trade our self, we build up a platform, making all the Taobao and Alibaba sellers to do it. We try to promote the industry, to make industry, because see, last six months was amazing, amazingly funny. When we announced we go to the mobile things, suddenly everybody said, “We are being in mobile system.” This is what I want. Let’s get people move with that. Because the mobile Internet is such a huge potential market for next China’s innovation.

Q: Coming back to Yahoo, there’s so much speculation about this future of Yahoo, but something most people are agreed on is that whatever happens to Yahoo, Alibaba is going to be thickly involved in any deals surrounding Yahoo. Do you agree with that analysis?

Q: Can be any deal for Yahoo without you being involved?

JM: Oh. I did not know we’re so important. [laughter] We wish we could, that’d be, that’d be that inference. But definitely, we are the main driving force. And we want to be the main driving force, and we want to do this thing as a partner-like thing.

Q: Okay, one follow-up question is you mentioned your interest in buying the whole of Yahoo. But do you see other outcomes for Yahoo? Do you think perhaps some people have speculated perhaps you’ll be interested in buying back your own stake held by Yahoo? Is that a possible outcome? Do you think that is more likely? Less likely than the sale of the whole of Yahoo?

JM:My answer, first, we are ready. Second, we also have options. And third, we are eagerly waiting for answers. [laughter] And they have to make decision. Today, as this environment, all the beautiful flowers withdraw very quickly. [laughter] And we got to, time is so precious for all of us. It’s not a good, it’s no good for Yahoo. It’s no good for everybody.

PK: So if you can sum up, Jerry Yang, Yahoo, independent directors, please make up your mind. Signed, Jack Ma.

JM: Yes! [laughter]

Meanwhile, Qunar.com Information Technology Co., a travel-search company of which Baidu owns a majority stake, said it planned to list its shares in the U.S. next year.

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“Going to China” is a trend we began to see among start-ups early last year, and it has picked up considerable momentum since then. Given the track record of U.S. Internet companies in China — which could at best be described as “mixed” and, at worst, “disastrous” — one might wonder why today’s upstarts believe they’ve got what it takes to be successful in the world’s largest Internet market. China has an estimated 400 million Internet users today, and will have 750 million by 2015, according to a recent McKinsey & Company study.

From our vantage point, it’s not that American entrepreneurs and CEOs suddenly feel they’ve cracked the code on China. Rather, the Chinese market opportunity has become so large, they simply can’t ignore it. The massive potential rewards of “going to China” now outweigh the massive potential risks — especially now that the U.S. market, with all its recent troubles, is no sure bet itself.

The market potential in China is easy to see when you visit the bustling streets of Shanghai or Beijing. As investors in both China and the U.S., we have our own take on why we think China is rapidly becoming a core strategy for every high-growth Internet company today.

• Growth for Fortune 100 companies is coming from China, not the U.S. (or Europe). Case in point: Mercedes sold more S-Class sedans in China last year than in the U.S. and Germany combined. Mercedes sales in China grew 60 percent last year versus nine percent in the rest of the world. Even if you own large-cap U.S. equities in your personal portfolio, mutual funds or 401K, those companies’ main revenue growth is likely coming from China — and economic growth in the U.S. is hardly assured at this point.
• Incomes are rising in China while remaining flat in the U.S. The Chinese middle class numbers in the hundreds of millions (100-300 million, depending on your source), with household income rising an estimated 98 percent since 2004, according to Credit Suisse Group. Even the bottom 20 percent of households saw their incomes rise 50 percent in the same time period. Contrast this with the U.S., where household income growth has stagnated, barely keeping pace with the rate of inflation since 1990. This flat-line income stagnation isn’t likely to change anytime soon, especially in today’s challenging economic climate.
• The Chinese have money, and they’re spending it. Chinese consumers buy an estimated 12 percent of the world’s luxury goods, growing at a 30 percent clip per year, according to Barclays Capital. Spend a day in Shanghai, Beijing or Hong Kong and you’ll be blown away at the breadth of luxury stores in major downtown areas — and the number of shoppers crowding the shops.

So what does this mean for U.S. Internet companies? It means the same thing it does for Mercedes, Apple or P&G — you simply can’t ignore China anymore.

To date, most success stories among U.S. tech companies in China are enterprise or mobile companies in the Fortune 1000 — HP, Microsoft, Cisco, Intel, etc. Each of these companies has built a $1B-plus business in China, but it took them decades to do so, with many speed bumps along the way.

We can’t argue with the dismal results of most U.S. Internet companies thus far in China — first-generation Internet companies like Amazon, eBay, Yahoo and Google have largely failed in China, and newcomers like Facebook and Twitter have been hampered due to strict Chinese government regulations. But we can highlight a few data points that suggest smart U.S. companies can and will attain success in China in the next five to 10 years.

• Demographics. Internet demographics keep getting better in China. Robin Li, founder and CEO of Baidu, spoke at our 10th anniversary event in Shanghai last November. He pointed out that when he launched Baidu in 1999, there were fewer than 30 million Internet users in China, and the total Internet ad market was worth less than $50 million. Today, Baidu sports a $50 billion market cap and Robin is a billionaire. Today there are more than 400 million Internet users in China. Combine this audience size with the rising incomes mentioned above, and you just can’t get a better audience for an Internet company.

• Market share. More than 70 percent of the world’s virtual goods sales in 2010 occurred in the Asia/Pacific region. It’s no wonder why Tencent, which pioneered the virtual goods market now being replicated by Zynga, generates more than $4 billion in annual revenue from gaming and virtual goods, and sports a $45 billion market capitalization. China’s Internet advertising market is growing at an estimated 50 percent or more per year.
• Platform diversity. In the U.S., Facebook is the go-to outlet for social marketing, accounting for more than 80 percent of the market (though it will be interesting to see if Google+ makes a dent in this over the next 12 months). In China, there are social platforms you’ve never heard of that each have hundreds of millions of users. Sina Weibo (think “China’s Twitter”) has more than 140 million users, more than 50 million monthly actives, and is adding more than 10 million new users per month. YY has millions of users, many of whom spend hours per day on the platform. Last year, YY users consumed more Internet voice minutes than Skype. (Disclosure: Our firm, GGV Capital, is an investor in YY.)

In recent months, several U.S. Internet companies have made their move on China. Zynga recently announced a partnership with Tencent to launch its games in China. Earlier in the year, Groupon entered China through an investment into local group-buying site GaoPeng.com. Both of these companies are going after China a mere two to three years after launching in the U.S. — an unheard-of undertaking just a few short years ago.

Our bet is there will be hundreds more U.S. Internet companies talking about China in the boardroom over the next two years. We’d wager more than 90 percent of high-profile American Internet companies will spend a lot of time, money, and energy to enter China — either on their own or via local partnerships. Many will fail to catch on with Chinese consumers. But for the relatively small percentage of companies that succeed, China will bring massively outsized returns. Internet companies that win the hearts and minds of Chinese consumers are the companies to bet on for long-term growth.

Jeff Richards (Menlo Park) and Jenny Lee (Shanghai) are Partners at GGV Capital, a $1 billion venture capital firm investing in the U.S. and China since 2000. Representative GGV investments include Alibaba Group, Pandora Media, YY, Buddy Media, Tudou, SuccessFactors, Square, and 21ViaNet.

Baidu’s earnings have been surging for more than a year as the company has added advertisers and benefited from a new keyword advertising system. It has also continued to eclipse Google Inc.’s share of the local search market since the U.S. company moved its China search engine to Hong Kong last year because of concerns about censorship and hacking in China.

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The deal ends a years-long struggle between China’s most popular website and the three big labels over a popular Baidu MP3 search service used to find links to music files around the Web, many of which were unlicensed. The music industry and the U.S. government have complained that the Baidu site was among the world’s most widely used platforms for unlicensed music downloads, with the U.S. Trade Representative listing Baidu as a “notorious” market for piracy.

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The Chinese search engine has increased its strong lead in China over Google Inc. — which analysts say users often prefer for English-language searches but which has suffered spotty accessibility in the past year — and is looking at expanding overseas, while Microsoft seeks to expand its share of China’s online search market.

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Because while the country is a key global market, doing business there is rife with all kinds of thorny challenges and troublesome compromises.

So, despite its progressively weaker denials, numerous sources said Facebook is preparing to launch in China. Now, the social networking giant is working out the details of a localized Chinese offering and trying to execute them as quickly as is prudent.

Perhaps the most important detail of Facebook’s planned China offering is that it will likely be connected to the greater international Facebook community, rather than operated as an independent social network.

While some had advised Facebook to start with a closed Chinese service, sources said the company seems inclined to launch it as a network linked to the rest of the world.

That’s not a decision without controversy, due to the strictures of operating within an authoritarian state.

When Facebook users outside China connect with users inside China, sources said they will need to click through a warning that any material visible to Chinese users may also be visible to the Chinese government.

Over the past few weeks, NetworkEffect has spoken to numerous sources in and around Facebook about how Facebook.cn will come to be.

Picking a Partner

As has been reported elsewhere, Facebook will almost certainly launch its China version in partnership with Baidu.

While Facebook insists that no deal has been signed with anyone, sources within and around the company described Baidu as the most serious competitor.

Alibaba had also been in the running, but sources said its leaders had voiced disagreement with Facebook’s vision for connecting Chinese users to one global social graph, rather than first starting with a closed system.

Alibaba advised the more conservative approach, given that the Chinese political situation is currently quite tricky and the U.S. government would likely find fault with Facebook seeming to play any role in censoring its users in China, said sources.

A source familiar with those talks said of Facebook’s inclination to go with Baidu over Alibaba, “It was an issue of Mr. Right Now instead of Mr. Right.”

Other partners considered included Sina, Tencent and China Mobile, but Sina and Tencent have their own social offerings that were judged to be too competitive with Facebook, said sources.

In the meantime, Baidu–often called the Google of China–is very much like Google in that it has little in the way of social strategy.

Facebook, led by its CEO Mark Zuckerberg, has increased its sense of urgency about having a presence in China. Zuckerberg visited China in December, where he met with entrepreneurs from Baidu, Sina and China Mobile.

Baidu leaders then came to visit Facebook twice in February, at which point some say a deal to work together was struck, although Facebook emphatically denies any official papers have been signed.

Facebook’s current official statement on the matter: “We are currently studying and learning about China, as part of evaluating any possible approaches that could benefit our users, developers and advertisers.”

Baidu had no comment.

The Perfect Time Is Never

Facebook, which is currently blocked in China, finds the market hard to resist despite the ethical implications of cooperating with its government. Zuckerberg said in an interview at Stanford last fall that Facebook determined in 2010 that China was one of the four remaining target countries it was not yet “winning or on a path to win,” along with Korea, Japan and Russia.

Of China, Zuckerberg said specifically: “How can you connect the whole world if you leave out 1.6 billion people?”

Leaders at the company–whose mission is to “make the world more open and connected”–feel it is important to include Chinese users as part of the larger global social network, rather than keeping them separate. The solution they have apparently arrived at is to show the warning messages about connections between the larger Facebook network and the Chinese-censored Facebook.

That sentiment could be looked at as laudable–as it brings a modicum of openness to China–or cynical, in that it requires a major ethical compromise.

That said, Facebook already employs censorship in several countries it operates in currently, such as Pakistan and Germany, in order to abide by local laws.

“It was a very active dialogue inside the company, but there was no other way to operate in China,” said a person familiar with the discussions.

And there aren’t good examples of American Internet companies successfully operating in China for Facebook to draw inspiration from.

Google’s internal moral dilemmas about operating in China are well known. But while Google is primarily a search engine, Facebook’s product is a platform for communication and organizing.

The situation in China is even more challenging following revolutions in the Middle East and North Africa that have been closely tied to Facebook and social media.

Facebook has been careful not to claim any credit for popular uprisings or to align itself as a force of democracy, but others outside the company have made those connections for it.

Facebook currently has about 400,000 active Chinese users, many of whom access the site by evading the so-called “Great Firewall of China” through use of virtual private networks.

Meanwhile, social sites within China are rocketing up in usage and becoming financially significant. Sina Weibo, which is much like Twitter, is said to have something like 100 million users.

And RenRen, the social network that has followed Facebook’s execution step by step, has filed to go public on the New York Stock Exchange with a $4 billion valuation.

Sources close to Facebook said that RenRen’s U.S. fundraising, in particular, is a significant motivator for Facebook to launch its China offering sooner rather than later.

“I would not discount the need for Facebook not to sit by and watch a significant competitor gain that much advantage,” said one person close to the situation.

Nuts and Bolts

Under discussions now taking place, sources said Facebook’s proposed plan could have Facebook and Baidu share the cost of setting up servers in China, and share revenue from the local version of the site. The local partner, Baidu, would presumably manage the censoring of the site and ongoing dealings with Chinese authorities.

As described above, when users outside China opt to connect to those inside China, they would see a warning message about the Chinese government.

As we all know, users are notoriously good at clicking through pop-up warnings without reading them, although this one is sure to get more notice.

Facebook could also use a combination of what it calls input filters and display filters, where Chinese users won’t be able to post or view content that’s objectionable to the Chinese government, but the rest of Facebook can run normally, sources said.

It will be a somewhat complicated technological endeavor to ensure that non-Chinese portions of the site don’t get stored in China.

Finally, Palo Alto, Calif.-based Facebook is considering sending a small group of its employees to help manage operations, but sources close to the company said this issue is still being debated due to safety considerations related to China’s oppressive government.

Ready, Set, Controversy

Net Jacobsson, who led Facebook’s previous effort to enter China–a translated version of the site that was launched around the time of the Beijing Olympics and was live for only a few days before being blocked–said in an interview with NetworkEffect that it’s not just entering China that’s difficult, but what comes after.

Jacobsson is no longer with the company and said he does not have direct knowledge of its current plans.

In addition to complying with rules forbidding political speech, gambling and pornography, as well as government requests for user information, American companies operating in China have to deal with ruthless local competition and incensed and vocal politicians in the United States.

“It will be difficult just trying to manage those two different worlds in a world that is so transparent,” Jacobsson said.

Obviously, Facebook getting involved in censorship in China will be a difficult concept for many people to swallow. In China, censorship is largely expected and normal and citizens are used to reading between the lines.

In the U.S., it’s considered a serious compromise of freedom.

Sources close to Facebook maintain that the company already censors some user contributions in accordance with local laws in Germany, Pakistan and Italy, so abiding by Chinese censorship rules is consistent.

But China’s size, importance and–more to the point–its suppression of free speech are unmatched.

(Please see the disclosure about Facebook in my ethics statement.)

Baidu, which derives nearly all of its revenue from search advertising, has been overtaking Google Inc.’s share of the Chinese search market since Google moved its China search engine to its Hong Kong website last year over concerns about censorship and hacking in mainland China. Baidu’s results have surged in the last year as a new keyword advertising system has fueled revenue growth.

“China’s Internet penetration rate is still under 35% and search is now the most widely used Internet application in the country. This gives Baidu plenty of room to further develop the market,” Chief Executive Robin Li said on a teleconference about the results.

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Beijing-based Baidu is rushing to assess about 2.8 million files on the website, Baidu Wenku, that have been pointed to as suspected of being unlicensed, said Baidu spokesman Kaiser Kuo.

Dozens of Chinese authors have lashed out at Baidu, one of China’s biggest Internet operators, and have criticized the company and Mr. Li, one of China’s most prominent entrepreneurs, saying that the site facilitates copyright infringement.

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People’s Daily, which Reuters reported Monday may be planning an initial public offering in Shanghai this year, launched a microblogging service last year and a search engine in December called Goso.com, appointing the former head of Google’s research institute in China as its chief scientist last month. Xinhua launched its own search engine, Panguso.com, in February in partnership with China Mobile, and CCTV has been operating an online video platform CNTV since the end of 2009.

“We cannot rule out the possibility that Panguso, like Goso, is a government tool to tighten control of the information search field,” an Internet user said on a Baidu online forum, under the name iaspecjack.

“Google studied how to find information … Baidu later studied how to find only parts of the information … Goso came in the latest and it studies how to not find information,” a user from Guangdong wrote on Chinese microblogging service Sina Weibo.

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The visit seems to have been a source of some sensitivity for Alibaba, for reasons that aren’t clear. Spokesman John Spelich, who is pictured in one of the photos along with Mr. Zuckerberg and Mr. Ma, declined to comment Thursday on whether or not the visit took place.

Officials at Baidu, Sina and China Mobile have been less sheepish about their meetings with Mr. Zuckerberg, whose visit has generated much excitement among Internet industry executives and enthusiasts in China. Indeed, while the government blocks access to Facebook from within China, many Chinese Internet users have welcomed Mr. Zuckerberg, whose wealth (and his Chinese-American girlfriend) have helped make him famous among China’s urban youth.

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Mr. Zuckerberg on Wednesday visited the offices of Sina Corp., a leading Chinese Web portal, and met with its CEO, Charles Chao. That followed a meeting Tuesday with Wang Jianzhou, chairman of state-owned telecommunications carrier China Mobile Ltd., and a visit Monday with Robin Li, CEO of Baidu Inc., at the Chinese search company’s headquarters.

The trip appeared to be an effort by the 26-year-old to learn more about the Chinese market, rather than discuss any specific business proposals. But it came as the Facebook founder openly has discussed a desire to get into China, where the government has blocked access to the site since last year.

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Alibaba Group, of which Yahoo Inc. owns a roughly 40 percent stake, launched a beta version of a website called Etao on Saturday, aimed at driving traffic to Alibaba’s retail website, Taobao.com.

Search results on Etao are displayed in several groups. Taobao listings, including images and product prices, appear first. Those are followed by links to related online forums. Next come informational websites and Web search results provided by Microsoft’s Bing search engine.

Alibaba and Microsoft (MSFT) confirmed that Etao is in public, or beta, testing, but declined further comment. A Yahoo (YHOO) spokeswoman declined to comment on the new search site. She added the company doesn’t have operational control over the Yahoo China business.

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In a surprisingly quick and even stealthy move, AOL has renewed and expanded its search agreement with Google, even though many had expected there to be more-competitive bidding throughout the fall to win the deal.

The five-year partnership to provide search technology and search advertising by powering AOL Search is more wide-ranging than the one it replaces, also including improved search products, global search, mobile search and also a video-distribution arrangement with YouTube, which could evolve over time to include content partnerships.

“We have tried to make a deal that has 100 percent alignment on what we each do best,” said AOL CEO Tim Armstrong in an interview last night with Boomtown. “At the end of the day, Google checked all the boxes.”

The search partnership between AOL (AOL) and Google (GOOG)–the third since 2002 actually–was set to run out December 19.

Thus, AOL had been talking for months with a number of new partner possibilities, especially with Microsoft (MSFT) about using its Bing search service for AOL.

Microsoft has been trying to improve its market share with the innovative Bing and has made great strides.

But, despite a valiant effort so far, it is still the No. 3 search engine, with about 11 percent of the market share, according to the latest comScore (SCOR) report for July, compared to 66 percent for Google and 17 percent for Yahoo (YHOO).

Adding AOL would have been a plus for Microsoft, since it has a 2.3 percent share.

But Armstrong said a deal was worked out early once AOL got what it wanted from Google, which certainly had the inside track in terms of experience in working with AOL.

Nonetheless, AOL had started the process of re-evaluating who it would pick to serve its search needs late last summer and had planned for a process to last closer to when the Google deal expired.

In April, Armstrong said, AOL re-engaged with all potential partners worldwide, which he said numbered a half-dozen.

He declined to name them, but sources said the other companies included Yahoo, as well as China’s Baidu.

The talks with Google were turbocharged when Armstrong–who, ironically, was one of the key Google execs who negotiated the first AOL deal, when he headed U.S. ad sales there–met with Google CEO Eric Schmidt and co-founders Larry Page and Sergey Brin at the Allen & Co. conference earlier this summer in Sun Valley, Idaho.

The deal moved quickly after that, with Armstrong wanting AOL to get access to the search innovation pipeline at Google, rather than just receive a more basic product.

He would not say if Google guaranteed search ad revenues in the deal, but sources said it has similar terms to the previous deal, which did include them.

The video part of the deal puts AOL content more prominently on YouTube and presumably it will be better programmed. AOL and Google will share ad revenue on the premium videos.

The mobile details are still being worked out, but will likely be served via Google’s mobile technology from its AdMob acquisition.

Armstrong admitted Google had the advantage from the start, especially since it knew how AOL Search performed, although early talks between the companies were initially rocky.

Perhaps that was due to the massive writedown in 2009 of the $1 billion investment Google–a key part of its previous search deal–had made in 2005 for a five percent stake in AOL, when it was still owned by Time Warner (TWX).

Armstrong also noted he wanted to avoid a lot of attention and uncertainty a bidding war would surely create.

“We had a no-drama policy on this,” said Armstrong. “And, as it turned out, this was not a single, not a double, not a triple, but a home run for us.”

Here is a detail-free–with promise of more to come–8-K filing AOL submitted to the Securities and Exchange Commission on its new deal with the Silicon Valley search behemoth:

AOLInc

Here is the official press release on the new Google-AOL deal:

AOL AND GOOGLE RENEW AND EXPAND GLOBAL PARTNERSHIP

MOUNTAIN VIEW, Calif. and NEW YORK, NY–September 2, 2010–Google Inc. (NASDAQ: GOOG) and AOL Inc. (NYSE: AOL) today announced a five-year renewal and expansion of one of the largest and longest-standing partnerships in Internet history. The global alliance, which has at its core Google’s provision of search services to AOL’s content network and properties, in exchange for a revenue-sharing arrangement between AOL and Google, will be expanded to include mobile search and YouTube.

“Today is another important step in the turnaround of AOL,” said Tim Armstrong, AOL’s Chairman and Chief Executive Officer. “AOL users will be getting a better search and search ads experience from the best search company in the world–Google. After nearly a decade-long partnership in search, we’re looking forward to expanding our global relationship to mobile search and YouTube. All aspects of our partnership will be improved by this deal.”

“We’re excited to deepen our partnership. This agreement combines Google’s expertise in search and advertising with AOL’s strength in online content,” said Eric Schmidt, Chairman and Chief Executive Officer of Google. “It’s particularly exciting to see our relationship expand into video and mobile. These areas are now at the heart of users’ online experiences and at the core of both of our businesses.”

The partnership includes a broad range of features that will improve and expand the products and services offered to consumers.

· Search Products: Google will provide AOL with additional features and enhancement to its leading Web search products that will improve the consumer search experience across AOL’s network of sites.

· Advertising Products: Google will provide AOL with best-in-class ad formats, giving AOL consumers a better, more relevant ad experience.

· Mobile Search: As AOL renews its focus on mobile apps and content, the companies will work together to expand the alliance to cover mobile search.

· YouTube: AOL and YouTube have agreed to a content partnership that will bring AOL’s video content to YouTube.

· Global Focus: The alliance is international in scope and will provide improved experiences to AOL’s worldwide audience.

Rainie Lei, a spokeswoman for China Mobile Ltd., the Hong Kong-listed unit of state-owned China Mobile Communications, confirmed the parent company had signed the agreement with Xinhua but declined to give details.

The cooperation, which is focused on building a search engine, has entered a phase of substantive operation, Xinhua said, without giving details.

A new search engine would compete with market leader Baidu Inc. (BIDU) and second-place Google Inc. (GOOG) in China, which had 420 million Internet users at the end of June, more than the entire U.S. population.

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Now, Robin Li, Baidu’s chief executive, must figure out new ways to grow amid immense investor expectations.

Mr. Li, a soft-spoken 41-year-old engineer who co-founded Baidu in 2000 after a stint in Silicon Valley, dismisses concerns that growth in Baidu’s core China search business will dry up anytime soon. With more than two-thirds of China’s population not yet Internet users, Mr. Li says search advertising will remain Baidu’s main growth driver for five to 15 years.

But he is looking to develop other revenue streams, including overseas and from ads on content pages created by Baidu or partners. He would also consider buying foreign Internet companies.

Baidu has played down its benefit from Google’s moving its China search service to Hong Kong, but Baidu’s share of revenue in China’s search-advertising market grew six percentage points in the second quarter to 70 percent, according to Beijing-based research firm Analysys International. Google’s share fell by about the same amount—to 24 percent.

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Baidu fielded the most mobile searches of any company in China in the second quarter, accounting for 34.3 percent of total searches after a rise of about five percentage points from the first quarter, local research firm Analysys International said Monday.

Meanwhile, Google’s share of the mobile searches fell by about five percentage points to 12.3 percent in the second quarter, moving it from second to third place behind local mobile search provider Easou.com, Analysys said.

Baidu is in talks with multiple handset makers about embedding a Baidu search box on their smartphones in China that use Android, Baidu Chief Executive Robin Li said in a recent interview. The company is in similar talks for phones with other operating systems, he said.

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The Beijing-based company is in talks with mobile handset makers that use the Android software about embedding a Baidu search box on their phones that are destined for the Chinese market, the company’s Chief Executive Robin Li said in an interview.

Targeting Android phones deepens Baidu’s competition with Google in China, as both companies look to expand in the small but fast-growing mobile search market there. Android phones made up a tiny 0.4 percent of the 7.25 million smartphones sold in China during the last three months of 2009, according to Beijing-based technology research firm Analysys International. Still, Baidu wants to capture as much of this budding market as early as possible.

The company is in similar talks with makers of other mobile operating systems and handsets that run their software, Mr. Li said. Baidu’s goal: To have “a search box very prominently on the phone’s screen.” Though he declined to name any companies, he said, “We are talking to quite a few big names.”

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Baidu reported a net profit of 837.4 million yuan, or about $123.5 million, for the second quarter, compared with 383.3 million yuan a year earlier.

The record profit translates to 2.4 yuan, or 35 U.S. cents, per American depositary share, compared with 1.1 yuan a year earlier. Excluding share-based compensation, earnings were 36 cents. Analysts had predicted 31 cents a share.

The Beijing-based company said it saw growth in the number of customers and its ability to extract revenue from them. Total active online-marketing customers grew 25 percent to 254,000 in the latest quarter, while revenue per customer rose 39 percent.

Google (GOOG), which has long been the No. 2 player in China’s search market behind Baidu, moved its Chinese search engine to Hong Kong in March after deciding it would no longer follow Chinese government requirements to censor its results. Users in China can still access the Hong Kong-based service, but the move irked Chinese regulators, and appears to have slowed the U.S. firm’s traffic in China.

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I mean really, all you have to choose from now is iOS 4, Android, WebOS, Windows Phone 7, BlackBerry OS, Symbian, MeeGo and a few others that have almost no traction. Not enough choices, right?

Well, no, according to the Chinese search engine Baidu (BIDU).

According to Information Week, various Chinese media reports suggest the company is considering the development of its own mobile phone OS.

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