Caixin
May 29, 2019 10:00 AM
TECH TALK

Baidu: A Bad BAT, or Canary in the China Coal Mine?

Bye bye Baidu?

That’s the sentiment buzzing through the Chinese internet world these past couple of weeks, ever since the search giant shocked markets by reporting its first-ever quarterly loss since going public in 2005. Since then the company’s stock has gone on a massive diet, losing about a quarter of its value and trimming more than $10 billion from its market value.

A major milestone that has many talking saw Baidu’s market value dip below that of Meituan Dianping, making the latter China’s third biggest internet company after the much larger Alibaba and Tencent. That got internet jargonistas talking about a new era of the ATM, short for Alibaba, Tencent and Meituan, replacing an earlier era of the BAT, an older shorthand for Baidu, Alibaba and Tencent.

All of this raises two big questions dogging Baidu that I’ll explore in the rest of this column. The first is whether the search giant’s day in the sun is truly over, or if this is just a temporary thing before it bounces back and reclaims its place among China’s internet triumvirate. The second is related but broader. It focuses on whether this potential changing of the guard points to Baidu-specific issues, or whether the company is the canary in a coal mine pointing to a longer winter ahead for China’s advertising-dependent internet firms.

First we’ll briefly recap the numbers that rocked Wall Street and set Baidu’s stock on its current downward trajectory. The headline figure saw Baidu report a loss of 327 million yuan ($47 million) for the first quarter, a sharp reversal from its 6.7 billion yuan profit a year earlier.

The primary culprit was a sharp slowdown in revenue from Baidu’s core businesses, which are dominated by its advertising-dependent search unit. Revenues from that part of the business, which account for 84% of its total, grew by an anemic 8% during the quarter — a fraction of the growth rates most people are used to seeing, including growth at three times that rate a year earlier.

Search has always been Baidu’s cash cow, supporting a string of failed and underperforming businesses the company has tried to launch over the years. As someone who has followed this company for more than a decade I can recall quite a few of the major flops, including the most recent cases of its Qunar travel service and the takeout dining service that it sold two years ago to rival Ele.me.

The bottom line, at least for me, is that Baidu always has been and always will be a search-dependent one-trick-pony. That’s not necessarily a bad thing, as I also consider Alibaba a similar creature in e-commerce. The big difference is that Baidu got fat and lazy due to lack of serious competition, whereas Alibaba has had to scramble to stay ahead of a crowded field of e-commerce wannabes, most notably JD.com and more recently up-and-comer Pinduoduo.

Lazy and sloppy

The laziness has led Baidu to engage in questionable business practices that seem to land the company in negative headlines on a fairly regular basis. The biggest of those back in 2016 forced Baidu to overhaul its practices for displaying search results after it came under intense criticism for not clearly differentiating between paid and organic search results.

More recently a former reporter blasted the company, in an article that later went viral, for becoming the equivalent of a search engine for its own content due to its tendency to highlight its own material at the top of its search results. My own experience pretty much mirrors that, and I rarely use Baidu unless I’m looking for a Chinese company or organization’s official website or background from Baidu’s own Wikipedia-like Baike site.

The takeaway from all this is that I really do think Baidu has lost its way in search, especially in the mobile era, and that this latest changing of the guard to ATM from BAT could be the real deal. Baidu still doesn’t have any meaningful search competition, though Google has recently tested the waters for a potential re-entry to the market after its noisy pullout in 2010. Some have also pointed out that the days of the global search engine could be numbered anyhow as people move to search within individual apps like Facebook or WeChat, though I’m not sure I buy that argument yet.

Then there’s the question of whether Baidu’s troubles, beyond being company-specific, might also point to rough waters ahead for the entire advertising-dependent internet sector. To answer that I looked at the latest earnings reports from leading web portal Sina and its Twitter-like Weibo affiliate, which are separately listed and both reported similarly disappointing results last week.

On the surface at least, that pair’s results look quite similar to Baidu’s. Sina said ad revenues from its core portal business actually contracted in the first quarter, while Weibo said its advertising and marketing revenue rose 13% to $341 million — a sharp slowdown from 79% growth a year earlier. Weibo forecast its revenue growth would further slow to between 7% and 10% in the current quarter. By comparison, Baidu said on its conference call that revenue from its Baidu Core segment could actually contract in the current quarter at the lower end of its forecast.

Sina and Weibo shares have also gone on their own diet over the last few weeks, both losing about 40% of their value since mid-April. With three canaries singing the same tune so loudly, it does seem quite clear that Baidu, while facing its own issues, is also getting caught up in a broader slowdown for China’s advertising market. All that means Baidu could be on the cusp of a longer-term period of stagnation, potentially following in the footsteps of former internet stars like Yahoo and Myspace.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com

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