If you ask a Chinese netzien, “Which search engine do you prefer?” There is over an 80% chance that the answer will be Baidu. Baidu’s role in China is as important as the role of Google in the U.S.. In China, we do not say, “Let’s google it!’ We say, “Let’s Baidu it!”
Baidu has 80% of the Market Share
Reigning over 80% of the search engine market share, Baidu is a very profitable company with takings of $363.2 million in the year of 2015. Although Baidu is still highly profitable, its quarterly/annual report showed that the company is struggling with controlling it’s shrinking margins which makes investors worried. In their Quarterly 2016 Q2 earnings report, Baidu’s net income dropped 34% compared to the Q2 in 2015. Baidu is still growing, but the pace is much slower than before as we can see from the chart below. If we take a close look at the current issues, we will find the following three problems which are contributing to this ongoing drop in profit margins.
A tragedy happened in May 2016 which hurt Baidu’s reputation badly. Wei Zexi, a 21-year-old college student who was diagnosed with a rare form of cancer was moving from hospital to hospital to seek treatment. However, with no success, he turned to China’s biggest search engine seeking for help. Baidu led Wei and his family to the ”Second Hospital of Beijing Armed Police Corps” to get treatment. After spending 20,000 Yuan (About$ 31,000), the treatment was not successful and Wei passed away on the morning of April 12, 2016. President Xi Jinping responded to this issue, “Web entrepreneurs should not regard clicks as their only goal… Social media organizers should not spread rumors. Search engines should not arrange the information sequence only based on how much they pay.” The allegation being that Baidu had not promoted the best hospital for this type of care. As a result of this issue, Baidu was questioned and criticized in terms of providing a ethical online platform for its users. This was the time when Baidu lost trust from some investors. In the following days, Baidu’s stock price dropped.
Analysts says Baidu has to change or die
The market value of Tencent & Alibaba both exceed $245 billion, but Baidu only has a valuation of $61 billion.
Baidu Inc needs to do more to diversify its business as the Chinese search engine firm falls behind domestic rivals Alibaba Group Holding Ltd and Tencent Holdings Ltd in revenue and profit, analysts said on Monday.
Such efforts are of urgent importance to help Baidu safeguard its position as one of China’s big three internet giants, they added.
In the second quarter ending in June, Baidu saw a 34 percent plunge in net income, which declined to $363 million and was less than one-fourth of that of Tencent, one of the most profitable tech firms in China.
Also, as the Beijing-based firm wrestled with tougher government regulations on online advertising in the second quarter, e-commerce heavyweight Alibaba delivered its most robust quarterly growth since its 2014 IPO, marked by a 59 percent year-on-year rise in revenue.
Vinsan Wang, an analyst at Tiger Brokerage Group, which provides internet brokerage for US and Hong Kong stocks, said the revenue and profit gap between Baidu and its two archrivals Alibaba and Tencent is widening, but Baidu is still one of the top players in China’s rapidly changing internet landscape.
Costs are getting higher and higher:
Another problem with Baidu nowadays is its own expenditure on research and development. Firstly, Baidu has invested heavily in mobile searching to increase its market share since 2013, a time when its desktop users were 2 times higher than its mobile users, the shift towards mobile use has been dramatic in the last five years. Soon, additional R&D increases costs quickly which shrink the profit margin from 2013 till now. Second, Baidu has the desire to join the trend of building artificial intelligence which was started by Google and Microsoft. As the pic showed below, Baidu’s research shows that its engineers are working on multiple projects related to AI engineering. The fact is that researching AI isn’t CHEAP.
Rise of other search engines:
In 2015 in China the total value of search engines was worth 80.76 billion (US$12.48 billion) with an increase of 34% from the previous year. Despite the fact that Baidu is still dominating the market with 80.8% of market share, Qihoo360, Sogou, Bing and Google China are hungry steal more market share from Baidu. The truth is, it is possible and it is actually happening already. Comparing to 2014, Baidu’s market share has dropped by 5.1% from 85.9%.
With an e-reputation issue, costs going up and the rise of other search engines, Baidu is currently having a hard time in adjusting its position to the present state of the market. But what will happen to Baidu in the long run? We will have to wait and see!