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Saturday, 29 October 2016 02:05

Search-engine limits force Baidu to seek new horizons

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BEIJING -- Baidu has hit a wall as the company struggles to overcome dependence on its mainstay internet search business, and the titan could lose its standing as one of China's big three in online services unless it cultivates new earnings sources.

Earnings barrier

The Nasdaq-listed company said Thursday that revenue for the July-September period slid 0.7% from a year earlier to 18.25 billion yuan ($2.68 billion), the first on-year drop since Baidu's 2005 debut on the U.S. stock market.

Stricter regulations for online ads are hurting Baidu's earnings, CEO Robin Li Yanhong said at the start of the earnings announcement.

Omens had been appearing. Though revenue had risen 30-50% annually for the past three years, that growth slowed to 10% in this year's April-June quarter. 

 

In April, a college student with cancer died after receiving questionable treatments based on ads shown on Baidu's website. Authorities tightened regulations on internet ads, leading to a plunge in medical service ads via Baidu.

Revenue from the core business of online marketing, which includes search engine ads, shrank 6.7% to 16.4 billion yuan. Clients decreased 15.9% to 524,000 companies as Baidu enhanced scrutiny of ad content in line with the government instruction. Some customers may have switched to rival ad platforms like mobile app WeChat by Tencent Holdings.

Baidu's removal of its travel website business from group earnings also dragged revenue down. Yet the company pulled off a 9.2% increase in net profit to 3.1 billion yuan by reducing costs in areas such as research and development.

But investors do not seem to appreciate the defensive Baidu. The stock price has fallen roughly 30% from its heyday in 2014. Baidu's market capitalization is less than one-quarter that of e-commerce giant Alibaba Group Holding or Tencent.

'BAT' to 'AT'?

Together the trio has been called the "BAT" internet service giants, with Baidu's initial coming first. But Baidu's earnings pale against the other two. Tencent's April-June sales soared 52% on the year to 35.6 billion yuan, while Alibaba's jumped 59% to 32.1 billion yuan. 

Baidu controls about 80% of internet search in China, serving 660 million users via smartphones alone. Global leader Google has virtually no presence here because the U.S. company refuses to accept information censorship by the Chinese authorities.

The search engine market's growth is gradually slowing. But online shopping is rising, and ad orders are seen recovering eventually. Baidu plans a comeback by narrowing its focus to preferred customers and working to raise the unit prices of ads.

Yet Baidu's revenue drop highlights the limits of depending on search ads. Alibaba expanded from e-commerce to online payment and cloud computing services, and the company is enjoying synergies from the varying operations. Tencent rakes in more game revenue through WeChat.

But Baidu is viewed as more cautious about launching new businesses. Its online payment service, begun in 2014, came 10 years after Alibaba's Alipay. Baidu Wallet has fewer than 100 million users, while Alipay tops 500 million.

Over the past five years, Baidu had about 10 acquisitions of at least $100 million, an analyst said. Alibaba and Tencent had more than triple such deals.

The acronym BAT has lost meaning in favor of two dominant players in Alibaba and Tencent, an internet industry analyst said. Baidu, which has charted its own path in China's internet market, has reached a critical juncture.

New engines

Baidu eyes artificial intelligence as a new growth pillar, and the company in 2014 welcomed Andrew Ng, a Stanford University professor and world authority in deep learning -- the basis of AI. He oversees Baidu's AI research institute in the U.S.

In September, Baidu formed a $200 million venture capital department to invest in AI, virtual reality and other such areas. Li himself heads the investment selection committee.

The company announced a plan this month to create Baidu Capital, a 20 billion yuan investment fund. Baidu also is developing AI for autonomous-driving cars by collaborating with a U.S. chipmaker.

 

Baidu seems to be watching Google, which also expanded from its search engine business. The two companies are similar in their strategy of spending 15% of revenue on research and development and in focusing on AI and autonomous driving. Google has reorganized itself into holding company Alphabet, in line with efforts to accelerate new-business development. Whether this approach succeeds has yet to be seen.

Meanwhile, Baidu faces its own challenge of producing synergies between its strength in search operations and the new business fields.

Source : asia.nikkei

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