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Searching for returns

25 Jul 2013 By John Foley, Robyn Mak

Baidu is digging itself a deep trench in China’s mobile wars. The country’s biggest search engine by user traffic reported a 39 percent increase in revenue for the second quarter of 2013 compared to the same period in 2012. Mobile revenue hit over ten percent of total for the first time. Google and Facebook have shown how heavy investments can pay off over time. Yet the cost is high and margins get squeezed. In China, competitive lines are more blurred. Returns may be even longer in coming.

Baidu’s $125 million of mobile revenue is a significant achievement, considering it only started to monetize its mobile search business last year. But the battle scars show in the profit line. Sales and marketing expenses, which include the cost of educating small businesses about mobile advertising, blew out by 83 percent when compared to a year earlier. Operating margins fell from a 51 percent a year ago to 38 percent.

In the West, Facebook and Google are further along a similar path. Facebook reported on July 25 that 41 percent of its revenue came from mobile in the second quarter, up from the 14 percent the social network registered six months ago. Google warned that the revenue clients pay per click fell 6 percent year on year, but said that more users were clicking on online ads than ever.

Baidu’s mobile war comes with distinctive Chinese characteristics. While China’s internet has three main players – Baidu, Alibaba and Tencent – market positions are far from settled. Apps and app stores, for example, are highly fragmented. Baidu pays to have its operating system pre-installed on Chinese smartphones, whereas Google’s ubiquitous Android operating system lets it roll out its mobile empire at lower cost. Even Baidu’s core desktop business is under siege from aggressive number-two search provider Qihoo, which is in talks to merge with the number three, Sogou.

In the meantime Baidu is doing the only thing it can: stiffening its competitive defences and paying up to grab more mobile traffic. The $1.9 billion intended purchase of app store operator 91 Wireless is an example. So is the company’s push into cloud computing. Both moves make strategic sense, yet neither is likely to give much to profits for years to come. Investors are taking a lot on trust.


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