SINGAPORE (July 1): For years, Chinese search engine giant Baidu, one of the world’s top digital technology companies, was the envy of the Asian corporate world. Because of its resemblance to the global search giant, it has been dubbed the “Google of China”. A year ago, its market capitalisation briefly exceeded US$100 billion. If you had bought the stock at the IPO, from trough to peak you would have made a 110-fold gain. Over the past year or so, Baidu’s fortunes have dipped precipitously. Now the region’s once-shining tech star is struggling to stay relevant.
Unlike other Chinese tech players, Baidu cannot blame the ongoing US-China trade war or President Donald Trump’s tariffs for its woes. It does not export anything to the US nor has it been accused of stealing any technology or intellectual property. It is essentially a Chinese domestic-focused search engine that depends on local advertising. While the spectre of the trade war and new tariff barriers is undoubtedly slowing the Chinese economy and, as a result, ad spending, most of Baidu’s competitors are still growing their share of advertising.
In mid-May, Baidu reported that it lost US$49 million ($66.4 million) in the last quarter, the first time it has been in the red since its 2005 listing on Nasdaq. While its core revenues grew 16%, earnings plunged 66% because of heavy marketing expenses, which nearly doubled in the previous year. Analysts now expect Baidu’s revenues to grow 7.5% this year to US$16.01 billion as earnings plunge 77%. Baidu stock is down nearly 60% from last year’s peak — and down 39% over the past five years — making it the world’s worst-performing large-cap tech stock. The search engine operator is now only the fifth-largest digital tech player in China in terms of market value, behind e-commerce giant Alibaba Group Holding and gaming behemoth Tencent Holdings, No 2 e-commerce player JD.com and food delivery firm Meituan Dianping.
Baidu co-founder Robin Li, a graduate of Buffalo’s State University of New York, helped develop online software for The Wall Street Journal, the first newspaper to charge for online access, before joining Infoseek, the pioneering search engine. While working as a software engineer at publisher Dow Jones, Li invented RankDex, the first web search engine with page ranking and site-scoring algorithms, which Google’s co-founders Larry Page and Sergey Brin fine-tuned to build their own search engine. At the height of the dotcom bubble in late 1999, Li returned to China to launch Baidu (literally “hundreds of times” in Chinese). Google’s decision to exit China over censorship concerns famously helped Baidu cement its grip in its home market and turned it into a US$100 billion global firm.
Despite its storied past, Baidu’s missteps are the stuff of tech industry legend. The Chinese search engine operator famously missed the switch to mobile eight years ago, putting all its eggs in the desktop basket long after smartphones had begun gaining momentum in China. When Baidu management belatedly realised that it needed to double down on mobile because most Chinese were searching for stuff on their smartphones or phablets rather than on PCs, it was late on clamping down on fake drugs ads that were being peddled through its website, a clear violation of Beijing’s strict laws against false advertising of medical products.
Fake drug ads
After a young cancer patient died when he sought out alternative treatment from a paid listing on Baidu’s site, tainting the company’s reputation, Beijing moved to tighten control over online advertising. Baidu has since shut down its ambitious mobile healthcare business unit ostensibly to refocus on more artificial intelligence-enabled healthcare research and innovation.
Baidu also missed the rise of digital payments (now effectively a duopoly in China with Alibaba-affiliated AliPay and Tencent’s WeChat Pay). It was a laggard in mobile gaming, where Tencent is by far the dominant player, and lost tons of money when it did belatedly try to catch up. Even though it once had its own ambitions in e-commerce, Baidu long ceded the space to Alibaba, a dominant player, as well as Tencent-affiliated JD.com and Pinduoduo. It still owns a 19% stake in Ctrip.com International, China’s dominant online travel firm.
Now, as technology is shifting from the mobile era to the artificial intelligence (AI) era, driven by deep learning and big data, Baidu is faltering again. As China’s economy slows, advertisers are drastically cutting ad spending. They are moving away from spending on search-related ads to more direct e-commerce related ads, which benefits rivals such as Alibaba or JD.com or superapp WeChat, news and information content platform Toutiao, short video app Douyin and others that are increasing their ad loads and putting significant pressure on ad pricing.
How did Baidu go from China’s premier digital tech firm to one that is now struggling to make money? For its part, Baidu blames its slump on, among other things, temporary redirection of web traffic, owing to its healthcare initiatives, and a generally unfavourable regulatory environment in China. Yet, Baidu’s problems are much deeper and more fundamental. For one thing, as its US peer Google has found out, search these days is no longer the key to a bagful of advertising dollars. Just as Americans no longer use Google to search for whatever they want to buy and instead head straight to Amazon.com’s website, most Chinese search Alibaba, JD.com, Pinduoduo and other e-commerce sites. That has diverted ad dollars to e-commerce players as well as Tencent, which has begun pulling in a lot of advertising in recent years as its WeChat has become the dominant go-to platform for nearly a billion Chinese who use it regularly.
Another more uniquely Chinese phenomenon, the pace of growth of websites and webpages in China has slowed dramatically, which means there is a smaller volume of information to index for a search engine such as Baidu. That is because the Chinese internet is different from the Western one that we outside China use. In China, superapps like WeChat are soaking up all the information online rather than the webpages. Chinese users spend more than 95% of their time on superapps on their mobile devices rather than webpages through a web browser. Moreover, a big portion of China’s e-commerce and social media ecosystems are walled off from Baidu’s searching index crawlers.
In essence, web search in China has splintered inside the apps. Baidu cannot index information within WeChat, whereas Sogou, a search engine in which Tencent has a stake, can. So, it is no surprise that less search has led to a lot less search advertising for Baidu. Online advertising at Tencent’s social and media platforms is growing 40% annually. Ads for Tencent’s WeChat grew 65% last year and are forecast to grow 38% this year, albeit from a lower base.
Challenging ad environment
Baidu is no longer the largest recipient of ads in China. Baidu’s share of digital ads in China has fallen from 32% in 2013 to 18% currently, including that of its subsidary iQiyi. Alibaba now has the largest share of digital advertising, with 37% of ads; Bytedance, which owns both Toutiao and Douyin, is second, with a 21% share of digital ads; and Tencent is fourth, with a 15% share of the market.
The growth in digital advertising in China and elsewhere in recent years has been driven by two main factors — a shift in ad budgets from traditional media such as newspapers, billboards radio and TV to digital and the growth in total advertising spending. Digital advertising already makes up 68% of total ad spend in China, according to consultancy eMarketer. With digital ads making up such a high share of the total ad market, the switch away from traditional media is slowing.
Baidu was a key beneficiary of the switch to digital. While total ad spending is forecast to grow at 14.6% in China this year, Sanford C Bernstein internet analyst David Dai notes that Baidu is not a beneficiary of growth in the entire ad market because the increase in total ad spending is due to substitution of other traditional forms of spending, mainly rental costs for brick-and-mortar stores. As more Chinese companies sell online through Alibaba, JD.com, Pinduoduo and other e-commerce platforms, they are advertising on those platforms rather than on search engines.
An advertising slump is just one of Baidu’s problems. Another issue is its rising costs. Heavy investments in content and user acquisitions have also weighed heavily on Baidu. In recent years, the company has also dramatically boosted its R&D budget, though it has very little to show for it so far. Baidu’s new big bets — video through
iQiyi as well as autonomous car project Apollo, and voice-based operating system DuerOS — are still in the early stages of development. Its forays in cloud infrastructure have been less than successful compared with Alibaba and Tencent, which have a commanding lead.
Do not write off Baidu just yet. CEO Li concedes that Baidu faces a “grim situation”, but he has vowed to keep investing as he navigates the firm’s return to growth. Baidu has plenty of cash and a huge talent pool. Its stakes in iQiyi and Ctrip.com are worth a combined US$10.8 billion, and it has US$10.5 billion net cash on its balance sheet. Li is hoping that his big bets on AI and driverless cars and cloud infrastructure will eventually bear fruit.
Assif Shameen is a technology writer based in North America
This story appears in The Edge Singapore (Issue 888, week of July 1) which is on sale now. Subscribe here