netrashetty
Netra Shetty
Biomet, Inc. is one of the world leading medical device manufacturer located in the Warsaw, Indiana business cluster.[1] The company specializes in reconstructive products for hips, knees and shoulders, fixation devices, orthopedic support devices, dental implants, spinal implants and operating room supplies.
Touted as the Google of China, Baidu has risen to become the number one Chinese language search provider and the most trafficked website in China since its launch six years ago. As an indigenous Chinese company that recently launched a US IPO, Baidu thrives off its superior understanding of the Chinese culture and language, allowing it to maintain a strong hold on the all-important Chinese internet market.
The increasingly lucrative nature of the Chinese Internet market provides great opportunity for Baidu, but it also attracts threatening competitors in the form of international search giants like Google (GOOG) and Yahoo! (YHOO), as well as Chinese competition from Sina (SINA), Sohu.com (SOHU), and Netease.com (NTES). As the Chinese government eases regulations on foreign investment, Baidu's competitors are increasing investment in their Chinese operations.
With its operations based out of China, Baidu faces risks resulting from domestic government policy. Government regulation of web content remains a threat to Baidu's operations--Government reprimand looms dangerous if Baidu fails to meet censorship standards. Also, as China attempts to move to international standards of intellectual property rights, Baidu faces potential lawsuits from Yahoo! (YHOO) over its P4P platform.
In Q4 2010, Baidu announced net sales of $371.3 million, up 94% from the year before, and a net income of $175.9 million, up from $62.7 million the year before. Baidu's success was dependent on an increased focus on e-commerce and online video, and its ability to grab more market share last year after rival Google curtailed its operations following a high-profile fallout with Beijing over censorship.[1]
Contents
1 Business Outline
1.1 Products and Services for Users
1.1.1 Expansion to Japan
1.1.2 Online Video Ads
1.2 Paid Products and Services for Customers
1.2.1 Online Marketing Services
1.2.2 Other Services
2 Trends and Forces
2.1 Growth in Chinese Internet Users Bodes Well For Baidu
2.2 Investments Costly in the Face of Strengthening Yuan
2.3 Internet Content Regulation by the Chinese Government Threatens Baidu
2.4 Baidu and Google are competing for the Chinese mobile search market
2.5 Changing Intellectual Property Enforcement Increases Lawsuits Risk
2.6 Microsoft (MSFT)'s Bing Threatens Baidu's Market Share
3 Competition
3.1 US-Based Internet Search Providers
3.2 Chinese Internet Companies
3.3 Traditional Advertising Media
4 References
Despite highlighting new investments, Baidu said growth should continue,
Business Outline
Founded in the year 2000, Baidu is the leading search engine in China. Its main search operation provides search for websites (740 million web pages), audio files (10 million), and images (80 million). Baidu went public in America with its initial public offering (IPO) on August 5th, 2005.
Baidu offers a unique Chinese language search platform to both users and customers. This platform consists of its own websites as well as the Baidu union, a network of third-party websites and software applications. Like Google (GOOG), Baidu has expanded from search into a plethora of other internet-based services. By generating traffic from its users, Baidu is able to attract customers, businesses aiming at increasing exposure, who pay for advertising. Revenues have grown rapidly since the company's founding, with the company's revenue increasing 58% in Q4 2008 to $132.7 million.[2] In Q1 2009, Baidu's revenue increased an additional 41.1% from a year earlier to $118.6 million.[3] These revenues fall into two divisions: Online Marketing Services and Other Services. As can be seen in the accompanying graph, the importance of revenues from Online Advertising has increased significantly over the past five years.
Source: Company Data
Source: Company Data
Products and Services for Users
Source: Credit Suisse
Baidu provides users an efficient Chinese language search portal for the web. But like Google, Baidu has also expanded beyond basic search to provide a wide range of web services designed to attract Chinese internet users to its site. The accompanying graph illustrates Baidu's dominance of China's search engine market, while Baidu's individual offerings are explained below.
Services Include:
Baidu Web Search - allows users to search the world wide web using Chinese language search terms. The Baidu search software depends on a continuously growing database of Chinese synonyms and associated phrases that are used to maintain efficient Chinese language searches.
Baidu Post Bar - provides users a query-based searchable community to exchange views and to share knowledge and experiences.
Baidu Information - an online news portal that provides links to a wide spread of news sources with a range of opinions.
Baidu Knows - a searcheable community in which users can share knowledge and experience. Users can also post questions and answers that add to this knowledge database.
Baidu MP3 Search - allows users to search the web for MP3s and other media files.
Baidu Image Search - users can search the web for images.
Other Search Products - Movie Search, Search Ranking, Web Directory, Map Search, Local Search, Ancient Chinese Literature Search, Government Information Search, Postal Code Search, Baidupedia, Baidu Space
Downloadable Applications - Baidu Desktop Search, Baidu Sobar
Online Games - In April 2008 Baidu announced its entrance into the online gaming market. The company released seven free games and their entertainment platform at the same time.[4]
Baidu's Chinese Homepage
Expansion to Japan
Currently the Japanese search market is split 65/35 between Yahoo and Google, respectively, but in December 2006, Baidu announced plans to launch a Japanese version of its website in 2007. Baidu has invested into R&D for Japanese search technology and opened an office in Japan. As of March 2009, Baidu employed 40 project managers responsible for the development of localized Japanese projects[5] The company plans to increase its presence in Japan- Baidu announced that it will increase the number of employees in Japan by about 80 people in 2009, as the company plans to implement various Internet products including a Japanese language search engine.[5] The Japan move raises the possibility of Baidu's expansion into other Asian markets as well, a decision which could help to hedge Baidu's revenues by spreading the revenues between more than one country.
Online Video Ads
In September 2007, Baidu launched an online video advertising service called Baidu.TV. This program enables advertisers to post video ads to Baidu's partner websites. Baidu has about 150,000 partner websites (Baidu Union member sites) [6].
Paid Products and Services for Customers
Baidu derives the majority of its revenues from internet advertising through its P4P platform, offering customers cost-effective and targeted marketing solutions. Baidu also generates income through the sale of enterprise search software and portal search services.
Baidu's revenues can be divided between Online Marketing Services and Other Services (which includes Enterprise Search Software and Portal Search Services).
Online Marketing Services
Source: Bear Sterns
Baidu operates its online marketing service (paid search) through a P4P platform that allows advertisers to reach Baidu users when they search for terms related to their products or services. Advertisers bid on search keywords so that links to their sites will appear when their keyword is searched for by Baidu users. Advertisers only pay this bid price when web surfers actually click on the links to their sites.
Baidu offers similar services on partner sites in the Baidu Union through the use of its ProTheme services. This caters to over 76,000 third-party websites in China. Revenues generated through this service are shared between Baidu and respective Baidu Union sites.
In September 2006, Baidu introduced an intelligent ranking system in its P4P platform similar to that of Google and Yahoo. Under this system, customers are rewarded for higher click-through rates by requiring lower price-per-clicks to maintain their rank.
Features of Baidu's Online Marketing Services:
Advertisers are rewarded for high click through rates on their links
Advertisers control their daily spending limits.
Advertisers can target particular geographic regions.
Baidu assists customers in improving their click through rates by assisting advertisers in choosing which keywords to bid on, adjusting keywords as necessary, and by providing reports on the performance of customers' advertisements.
Online Marketing Customer Base Baidu has a diverse mix of online marketing customers, including corporations of all sizes. These customers are broadly spread over all industries and geographies. As can be seen in the accompanying graph, growth in advertising revenues generated from SMEs (small and medium enterprises) seeking to increase visibility at a low cost has caused a boom in the Chinese online marketing industry. In order to foster growth in this area, Baidu has placed over 200 distributors across China who educate potential customers and promote the Baidu P4P platform. This physical presence is necessary, as many new internet users in China require education in order to use Baidu's online marketing services.
Other Services
Baidu also sells enterprise search software and related services to government agencies and private sector companies in China. These services use Baidu's Chinese search technology to manage information for Baidu customers on the world wide web and on various intranets. In such cases, the customer pays a one-time free for Baidu to deliver the software. Furthermore, Baidu released its beta C2C feature that will enable users to sell and purchase items on web-based stores.[7]
Trends and Forces
Growth in Chinese Internet Users Bodes Well For Baidu
Source: www.metrics2.com/
As a result of a continued economic boom with GDP growth consistently registering double-digit levels, China has witnessed unprecedented growth in internet usage. The accompanying graph shows the rapid growth of China's internet-using population, now the second largest internet-using population in the world at 137 million users. While impressive, this number still only accounts for 10.5% of China's 1.4 billion people, leaving a great deal of growth potential (growth rates are forecasted at 15% CAGR).
The quality of internet access is also improving in China, with the broadband-using population standing at 90.7 million and the wireless-technology-using population standing at 17 million.
Surprisingly, Chinese internet users show a great deal of economic diversity, and the largest income group earns less than Chinese 500 RMB (US$64) per month. Only 1.6% of users had a monthly income of more than 10,000 RMB (US$12,800). Currently over half of this population state that they use the internet for online searching. Growth from the remaining half will further increase traffic for Baidu's various web services, making online advertising even more attractive for potential customers of Baidu's online marketing services. In Q3 2008, Baidu attracted 194,000 active online marketing customers, a 35.7% increase from Q3 2007, as the Chinese middle class has gained more access to the Internet.[7] In Q4 2008, Baidu's customer base increased an additional 1.5% from Q3 to 197,000.[2] As a result of this significant growth in users, BIDU's revenue jumped by 58% to $132.7 million in the quarter.[2] Additionally, RBC Capital announced its expectations for the amount of Internet users in China to grow by 26%-27% in 2009, signaling significant jumps in Baidu's volume of clicks and searches.[8]
Investments Costly in the Face of Strengthening Yuan
Historical RMB US Dollar Exchange Rate, Source: Yahoo Finance
Exchange rates will affect Baidu since its revenues and costs are denominated in RMB while its financial assets are predominantly given in dollars. Baidu's dividends and other dollar fees paid to its ADS (American Depository Share) holders depend upon the revenue generated by its Chinese subsidiaries and affiliates in RMB. Significant revaluations of the RMB would affect Baidu's cash flows, revenues, financial positions, earnings, and the value dividends payable on its ADSs in US dollars.
Value increases in the RMB relative to the dollar make investments or expenses denominated in RMB more costly for Baidu, since the company generates its financial capital in US dollar denominations. Value increases in the RMB relative to the dollar will also improve Baidu's revenue numbers as reported in dollars, will improve Baidu's ability to pay dollar denominated dividends from revenue and will improve Baidu's ability to finance expansions from RMB revenues. Additionally, all of Baidu's liabilities denominated in dollars will bi minimized by an appreciating RMB.
As the horizontal line in the accompanying exchange rate graph shows, the Chinese currency had traditionally been fixed at 8.28 RMB to the US dollar. When pressure from the US removed the fixed exchange rate policy in July 2005, the Chinese yuan (RMB) appreciated against the dollar. Currently, the RMB is pegged to a basket of foreign currencies and may trade within a 0.3% daily band against this basket of currencies.
Internet Content Regulation by the Chinese Government Threatens Baidu
The Chinese government has several regulations governing Internet access, new distribution, and other content. Under these regulations, Internet content providers can be charged with breaking the law if they display so-called "illegal content." With the Baidu Post Bar and several other third-party link services, Baidu will hav difficulty controlling the content for which it is deemed responsible. In June of 2002, Baidu was forced to shut its servers for a week and pay a RMB 10,000 fine because its search results contained "socially harmful" material. Baidu faces the risk of having its license revoked or servers shut down if it fails to comply with such government regulations.
Baidu and Google are competing for the Chinese mobile search market
As 3G services and smartphones spread in popularity in China, Baidu and Google have developed a rivalry for the Chinese mobile search market. China has approximately 338 million internet users, but an estimated 600 million Chinese residents have mobile phones, and the mobile search market is thus expected to bring in billions of U.S. dollars in revenue. As of September 2009, Google was ranked No. 1 among all search engines in terms of revenues on the global mobile internet market, but is tied with Baidu in the Chinese mobile search market with about a 26% share. Thus, the Chinese mobile search market is a valuable market for Baidu, as success there will bring in a lot of revenue.[9]
Changing Intellectual Property Enforcement Increases Lawsuits Risk
While China is notorious for intellectual property law infringements, the government is being pressured to rise to international standards. With the recent government movement to strengthen IP protection, Baidu faces many potential attacks. Much of Baidu's technology and business methods (namely the pay-for-performance P4P platform) could face claims limiting their use. Yahoo! (YHOO) subsidiary Overture Services Inc. applied for a patent in China for its P4P platform before Baidu applied for its P4P patent. Currently no patents for P4P platforms have been granted in China, but once a patent is granted, the situation will complicate. With IP laws still evolving in China, the interpretation and application of Chinese patent laws are rife with uncertainty. If Overture succeeds in receiving a patent before Baidu, this may place Baidu in an extremely sticky situation attempting to deflect a potential lawsuit from Overture. To further Baidu's worries, Overture has already been granted patents in the United States for the P4P platform, and has launched patent infringement claims within the USA with websites like Findwhat.com. While Baidu conducts operations outside America, this is no guarantee that holders of such patents will not try to enforce these patents in China as well.
The risk is not limited to Baidu's P4P technology. Baidu also offers a very popular MP3 search application, as well as forums for users to post information. Such features put Baidu at risk for entanglement in illegal content hosting cases. If launched, such court cases would place considerable strain on Baidu's resources.
On the other hand, Baidu itself has weak IP protection for its own technologies and business products. Thus, without stronger IP laws, Baidu faces the risk of having its own services and technologies copied by competitors.
Microsoft (MSFT)'s Bing Threatens Baidu's Market Share
In June 2009, Microsoft (MSFT) launched its new online search engine, Bing, in hopes to take market share from Google and Baidu. Microsoft has created "technology search centers" in India, China and Japan in order to shrink Baidu's approximate 60% market share throughout Asia.[10] MSFT's Bing uses superior technology that it believes will provide better, more comprehensive searches with enhanced translation abilities that will eventually erode Baidu's stronghold in the region.[10]
Competition
Source: Bear Sterns
Source: Credit Suisse
Source: Credit Suisse
With China's continued economic boom and the resulting growth of its internet-using population, the internet search industry in China has become extremely competitive. Baidu faces competition from three sources:
US-Based Internet Search Providers - Google (GOOG) , Yahoo! (YHOO) , Microsoft (MSFT)
Chinese Internet Companies - Sina (SINA) , Sohu.com (SOHU) , Netease.com (NTES) , Sougou, Yisou, Zhong Sou
Traditional Advertising Media
US-Based Internet Search Providers
Companies like Google (GOOG), Yahoo! (YHOO), and Microsoft (MSFT) have a strong global presence in internet search and are backed by deeper pockets and well-established brand names. Currently, Baidu is sheltered by Chinese government regulations which regulate foreign direct investment and licenses, etc. As this protection is gradually removed, the Chinese internet search landscape will become increasingly competitive as US operators continue to soup up their lucrative Chinese operations. These websites will compete for traffic in a bid to increase the value of online marketing on their websites. In order to attract visitors, they must compete in terms of quality (relevance) and quantity (index size) of search results and in perceived ease of use. The accompanying graph shows Baidu's strength compared to competitors in terms of user satisfaction. Currently, Google poses the largest threat to Baidu.
As shown in the accompanying graph, Baidu stacks up rather poorly with international competition in terms of its user profile. Google (GOOG) tends to attract a better user profile by monthly income, age, gender mix, education level, and urban penetration. The results of this contrast appear in the higher ROI experienced by Google (GOOG) advertisers. Google (GOOG)'s Chinese market share has grown to 19% in 2006, as many customers prefer the international appeal of Google as an advertising platform. In fact, Baidu's market share is expected to peak at 56% in 2007, after which it may decline in the face of fierce competition.
Chinese Internet Companies
Top Chinese internet portals Sina (SINA), Sohu.com (SOHU), and Netease.com (NTES) offer online services like news, wireless value-added services, email, online shopping, chat, and social networks targeting the Chinese internet audience. Thus, these sites directly compete with Baidu for user traffic. Sina (SINA) has a search engine named "iAsk" which competes directly with Baidu for search-based advertising spending. Other emerging Chinese internet search service providers such as Sougou, Yisou, and Zhong Sou could also evolve into major rivals.
Traditional Advertising Media
Traditional advertising media in the forms of newspapers, yellow pages, magazines, billboards, TV, and radio compete with internet advertising for advertiser dollars. Currently, 7% of advertising dollars in America find their way to internet advertising. While this represents a small share of advertising dollars, internet advertising has grown at a rate of 18% from 2001 to 2006.
Touted as the Google of China, Baidu has risen to become the number one Chinese language search provider and the most trafficked website in China since its launch six years ago. As an indigenous Chinese company that recently launched a US IPO, Baidu thrives off its superior understanding of the Chinese culture and language, allowing it to maintain a strong hold on the all-important Chinese internet market.
The increasingly lucrative nature of the Chinese Internet market provides great opportunity for Baidu, but it also attracts threatening competitors in the form of international search giants like Google (GOOG) and Yahoo! (YHOO), as well as Chinese competition from Sina (SINA), Sohu.com (SOHU), and Netease.com (NTES). As the Chinese government eases regulations on foreign investment, Baidu's competitors are increasing investment in their Chinese operations.
With its operations based out of China, Baidu faces risks resulting from domestic government policy. Government regulation of web content remains a threat to Baidu's operations--Government reprimand looms dangerous if Baidu fails to meet censorship standards. Also, as China attempts to move to international standards of intellectual property rights, Baidu faces potential lawsuits from Yahoo! (YHOO) over its P4P platform.
In Q4 2010, Baidu announced net sales of $371.3 million, up 94% from the year before, and a net income of $175.9 million, up from $62.7 million the year before. Baidu's success was dependent on an increased focus on e-commerce and online video, and its ability to grab more market share last year after rival Google curtailed its operations following a high-profile fallout with Beijing over censorship.[1]
Contents
1 Business Outline
1.1 Products and Services for Users
1.1.1 Expansion to Japan
1.1.2 Online Video Ads
1.2 Paid Products and Services for Customers
1.2.1 Online Marketing Services
1.2.2 Other Services
2 Trends and Forces
2.1 Growth in Chinese Internet Users Bodes Well For Baidu
2.2 Investments Costly in the Face of Strengthening Yuan
2.3 Internet Content Regulation by the Chinese Government Threatens Baidu
2.4 Baidu and Google are competing for the Chinese mobile search market
2.5 Changing Intellectual Property Enforcement Increases Lawsuits Risk
2.6 Microsoft (MSFT)'s Bing Threatens Baidu's Market Share
3 Competition
3.1 US-Based Internet Search Providers
3.2 Chinese Internet Companies
3.3 Traditional Advertising Media
4 References
Despite highlighting new investments, Baidu said growth should continue,
Business Outline
Founded in the year 2000, Baidu is the leading search engine in China. Its main search operation provides search for websites (740 million web pages), audio files (10 million), and images (80 million). Baidu went public in America with its initial public offering (IPO) on August 5th, 2005.
Baidu offers a unique Chinese language search platform to both users and customers. This platform consists of its own websites as well as the Baidu union, a network of third-party websites and software applications. Like Google (GOOG), Baidu has expanded from search into a plethora of other internet-based services. By generating traffic from its users, Baidu is able to attract customers, businesses aiming at increasing exposure, who pay for advertising. Revenues have grown rapidly since the company's founding, with the company's revenue increasing 58% in Q4 2008 to $132.7 million.[2] In Q1 2009, Baidu's revenue increased an additional 41.1% from a year earlier to $118.6 million.[3] These revenues fall into two divisions: Online Marketing Services and Other Services. As can be seen in the accompanying graph, the importance of revenues from Online Advertising has increased significantly over the past five years.
Source: Company Data
Source: Company Data
Products and Services for Users
Source: Credit Suisse
Baidu provides users an efficient Chinese language search portal for the web. But like Google, Baidu has also expanded beyond basic search to provide a wide range of web services designed to attract Chinese internet users to its site. The accompanying graph illustrates Baidu's dominance of China's search engine market, while Baidu's individual offerings are explained below.
Services Include:
Baidu Web Search - allows users to search the world wide web using Chinese language search terms. The Baidu search software depends on a continuously growing database of Chinese synonyms and associated phrases that are used to maintain efficient Chinese language searches.
Baidu Post Bar - provides users a query-based searchable community to exchange views and to share knowledge and experiences.
Baidu Information - an online news portal that provides links to a wide spread of news sources with a range of opinions.
Baidu Knows - a searcheable community in which users can share knowledge and experience. Users can also post questions and answers that add to this knowledge database.
Baidu MP3 Search - allows users to search the web for MP3s and other media files.
Baidu Image Search - users can search the web for images.
Other Search Products - Movie Search, Search Ranking, Web Directory, Map Search, Local Search, Ancient Chinese Literature Search, Government Information Search, Postal Code Search, Baidupedia, Baidu Space
Downloadable Applications - Baidu Desktop Search, Baidu Sobar
Online Games - In April 2008 Baidu announced its entrance into the online gaming market. The company released seven free games and their entertainment platform at the same time.[4]
Baidu's Chinese Homepage
Expansion to Japan
Currently the Japanese search market is split 65/35 between Yahoo and Google, respectively, but in December 2006, Baidu announced plans to launch a Japanese version of its website in 2007. Baidu has invested into R&D for Japanese search technology and opened an office in Japan. As of March 2009, Baidu employed 40 project managers responsible for the development of localized Japanese projects[5] The company plans to increase its presence in Japan- Baidu announced that it will increase the number of employees in Japan by about 80 people in 2009, as the company plans to implement various Internet products including a Japanese language search engine.[5] The Japan move raises the possibility of Baidu's expansion into other Asian markets as well, a decision which could help to hedge Baidu's revenues by spreading the revenues between more than one country.
Online Video Ads
In September 2007, Baidu launched an online video advertising service called Baidu.TV. This program enables advertisers to post video ads to Baidu's partner websites. Baidu has about 150,000 partner websites (Baidu Union member sites) [6].
Paid Products and Services for Customers
Baidu derives the majority of its revenues from internet advertising through its P4P platform, offering customers cost-effective and targeted marketing solutions. Baidu also generates income through the sale of enterprise search software and portal search services.
Baidu's revenues can be divided between Online Marketing Services and Other Services (which includes Enterprise Search Software and Portal Search Services).
Online Marketing Services
Source: Bear Sterns
Baidu operates its online marketing service (paid search) through a P4P platform that allows advertisers to reach Baidu users when they search for terms related to their products or services. Advertisers bid on search keywords so that links to their sites will appear when their keyword is searched for by Baidu users. Advertisers only pay this bid price when web surfers actually click on the links to their sites.
Baidu offers similar services on partner sites in the Baidu Union through the use of its ProTheme services. This caters to over 76,000 third-party websites in China. Revenues generated through this service are shared between Baidu and respective Baidu Union sites.
In September 2006, Baidu introduced an intelligent ranking system in its P4P platform similar to that of Google and Yahoo. Under this system, customers are rewarded for higher click-through rates by requiring lower price-per-clicks to maintain their rank.
Features of Baidu's Online Marketing Services:
Advertisers are rewarded for high click through rates on their links
Advertisers control their daily spending limits.
Advertisers can target particular geographic regions.
Baidu assists customers in improving their click through rates by assisting advertisers in choosing which keywords to bid on, adjusting keywords as necessary, and by providing reports on the performance of customers' advertisements.
Online Marketing Customer Base Baidu has a diverse mix of online marketing customers, including corporations of all sizes. These customers are broadly spread over all industries and geographies. As can be seen in the accompanying graph, growth in advertising revenues generated from SMEs (small and medium enterprises) seeking to increase visibility at a low cost has caused a boom in the Chinese online marketing industry. In order to foster growth in this area, Baidu has placed over 200 distributors across China who educate potential customers and promote the Baidu P4P platform. This physical presence is necessary, as many new internet users in China require education in order to use Baidu's online marketing services.
Other Services
Baidu also sells enterprise search software and related services to government agencies and private sector companies in China. These services use Baidu's Chinese search technology to manage information for Baidu customers on the world wide web and on various intranets. In such cases, the customer pays a one-time free for Baidu to deliver the software. Furthermore, Baidu released its beta C2C feature that will enable users to sell and purchase items on web-based stores.[7]
Trends and Forces
Growth in Chinese Internet Users Bodes Well For Baidu
Source: www.metrics2.com/
As a result of a continued economic boom with GDP growth consistently registering double-digit levels, China has witnessed unprecedented growth in internet usage. The accompanying graph shows the rapid growth of China's internet-using population, now the second largest internet-using population in the world at 137 million users. While impressive, this number still only accounts for 10.5% of China's 1.4 billion people, leaving a great deal of growth potential (growth rates are forecasted at 15% CAGR).
The quality of internet access is also improving in China, with the broadband-using population standing at 90.7 million and the wireless-technology-using population standing at 17 million.
Surprisingly, Chinese internet users show a great deal of economic diversity, and the largest income group earns less than Chinese 500 RMB (US$64) per month. Only 1.6% of users had a monthly income of more than 10,000 RMB (US$12,800). Currently over half of this population state that they use the internet for online searching. Growth from the remaining half will further increase traffic for Baidu's various web services, making online advertising even more attractive for potential customers of Baidu's online marketing services. In Q3 2008, Baidu attracted 194,000 active online marketing customers, a 35.7% increase from Q3 2007, as the Chinese middle class has gained more access to the Internet.[7] In Q4 2008, Baidu's customer base increased an additional 1.5% from Q3 to 197,000.[2] As a result of this significant growth in users, BIDU's revenue jumped by 58% to $132.7 million in the quarter.[2] Additionally, RBC Capital announced its expectations for the amount of Internet users in China to grow by 26%-27% in 2009, signaling significant jumps in Baidu's volume of clicks and searches.[8]
Investments Costly in the Face of Strengthening Yuan
Historical RMB US Dollar Exchange Rate, Source: Yahoo Finance
Exchange rates will affect Baidu since its revenues and costs are denominated in RMB while its financial assets are predominantly given in dollars. Baidu's dividends and other dollar fees paid to its ADS (American Depository Share) holders depend upon the revenue generated by its Chinese subsidiaries and affiliates in RMB. Significant revaluations of the RMB would affect Baidu's cash flows, revenues, financial positions, earnings, and the value dividends payable on its ADSs in US dollars.
Value increases in the RMB relative to the dollar make investments or expenses denominated in RMB more costly for Baidu, since the company generates its financial capital in US dollar denominations. Value increases in the RMB relative to the dollar will also improve Baidu's revenue numbers as reported in dollars, will improve Baidu's ability to pay dollar denominated dividends from revenue and will improve Baidu's ability to finance expansions from RMB revenues. Additionally, all of Baidu's liabilities denominated in dollars will bi minimized by an appreciating RMB.
As the horizontal line in the accompanying exchange rate graph shows, the Chinese currency had traditionally been fixed at 8.28 RMB to the US dollar. When pressure from the US removed the fixed exchange rate policy in July 2005, the Chinese yuan (RMB) appreciated against the dollar. Currently, the RMB is pegged to a basket of foreign currencies and may trade within a 0.3% daily band against this basket of currencies.
Internet Content Regulation by the Chinese Government Threatens Baidu
The Chinese government has several regulations governing Internet access, new distribution, and other content. Under these regulations, Internet content providers can be charged with breaking the law if they display so-called "illegal content." With the Baidu Post Bar and several other third-party link services, Baidu will hav difficulty controlling the content for which it is deemed responsible. In June of 2002, Baidu was forced to shut its servers for a week and pay a RMB 10,000 fine because its search results contained "socially harmful" material. Baidu faces the risk of having its license revoked or servers shut down if it fails to comply with such government regulations.
Baidu and Google are competing for the Chinese mobile search market
As 3G services and smartphones spread in popularity in China, Baidu and Google have developed a rivalry for the Chinese mobile search market. China has approximately 338 million internet users, but an estimated 600 million Chinese residents have mobile phones, and the mobile search market is thus expected to bring in billions of U.S. dollars in revenue. As of September 2009, Google was ranked No. 1 among all search engines in terms of revenues on the global mobile internet market, but is tied with Baidu in the Chinese mobile search market with about a 26% share. Thus, the Chinese mobile search market is a valuable market for Baidu, as success there will bring in a lot of revenue.[9]
Changing Intellectual Property Enforcement Increases Lawsuits Risk
While China is notorious for intellectual property law infringements, the government is being pressured to rise to international standards. With the recent government movement to strengthen IP protection, Baidu faces many potential attacks. Much of Baidu's technology and business methods (namely the pay-for-performance P4P platform) could face claims limiting their use. Yahoo! (YHOO) subsidiary Overture Services Inc. applied for a patent in China for its P4P platform before Baidu applied for its P4P patent. Currently no patents for P4P platforms have been granted in China, but once a patent is granted, the situation will complicate. With IP laws still evolving in China, the interpretation and application of Chinese patent laws are rife with uncertainty. If Overture succeeds in receiving a patent before Baidu, this may place Baidu in an extremely sticky situation attempting to deflect a potential lawsuit from Overture. To further Baidu's worries, Overture has already been granted patents in the United States for the P4P platform, and has launched patent infringement claims within the USA with websites like Findwhat.com. While Baidu conducts operations outside America, this is no guarantee that holders of such patents will not try to enforce these patents in China as well.
The risk is not limited to Baidu's P4P technology. Baidu also offers a very popular MP3 search application, as well as forums for users to post information. Such features put Baidu at risk for entanglement in illegal content hosting cases. If launched, such court cases would place considerable strain on Baidu's resources.
On the other hand, Baidu itself has weak IP protection for its own technologies and business products. Thus, without stronger IP laws, Baidu faces the risk of having its own services and technologies copied by competitors.
Microsoft (MSFT)'s Bing Threatens Baidu's Market Share
In June 2009, Microsoft (MSFT) launched its new online search engine, Bing, in hopes to take market share from Google and Baidu. Microsoft has created "technology search centers" in India, China and Japan in order to shrink Baidu's approximate 60% market share throughout Asia.[10] MSFT's Bing uses superior technology that it believes will provide better, more comprehensive searches with enhanced translation abilities that will eventually erode Baidu's stronghold in the region.[10]
Competition
Source: Bear Sterns
Source: Credit Suisse
Source: Credit Suisse
With China's continued economic boom and the resulting growth of its internet-using population, the internet search industry in China has become extremely competitive. Baidu faces competition from three sources:
US-Based Internet Search Providers - Google (GOOG) , Yahoo! (YHOO) , Microsoft (MSFT)
Chinese Internet Companies - Sina (SINA) , Sohu.com (SOHU) , Netease.com (NTES) , Sougou, Yisou, Zhong Sou
Traditional Advertising Media
US-Based Internet Search Providers
Companies like Google (GOOG), Yahoo! (YHOO), and Microsoft (MSFT) have a strong global presence in internet search and are backed by deeper pockets and well-established brand names. Currently, Baidu is sheltered by Chinese government regulations which regulate foreign direct investment and licenses, etc. As this protection is gradually removed, the Chinese internet search landscape will become increasingly competitive as US operators continue to soup up their lucrative Chinese operations. These websites will compete for traffic in a bid to increase the value of online marketing on their websites. In order to attract visitors, they must compete in terms of quality (relevance) and quantity (index size) of search results and in perceived ease of use. The accompanying graph shows Baidu's strength compared to competitors in terms of user satisfaction. Currently, Google poses the largest threat to Baidu.
As shown in the accompanying graph, Baidu stacks up rather poorly with international competition in terms of its user profile. Google (GOOG) tends to attract a better user profile by monthly income, age, gender mix, education level, and urban penetration. The results of this contrast appear in the higher ROI experienced by Google (GOOG) advertisers. Google (GOOG)'s Chinese market share has grown to 19% in 2006, as many customers prefer the international appeal of Google as an advertising platform. In fact, Baidu's market share is expected to peak at 56% in 2007, after which it may decline in the face of fierce competition.
Chinese Internet Companies
Top Chinese internet portals Sina (SINA), Sohu.com (SOHU), and Netease.com (NTES) offer online services like news, wireless value-added services, email, online shopping, chat, and social networks targeting the Chinese internet audience. Thus, these sites directly compete with Baidu for user traffic. Sina (SINA) has a search engine named "iAsk" which competes directly with Baidu for search-based advertising spending. Other emerging Chinese internet search service providers such as Sougou, Yisou, and Zhong Sou could also evolve into major rivals.
Traditional Advertising Media
Traditional advertising media in the forms of newspapers, yellow pages, magazines, billboards, TV, and radio compete with internet advertising for advertiser dollars. Currently, 7% of advertising dollars in America find their way to internet advertising. While this represents a small share of advertising dollars, internet advertising has grown at a rate of 18% from 2001 to 2006.
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