Beneath Baidu’s positive results lie brand, trust burdens

Search giant Baidu has faced mounting challenges to its consumer-facing businesses, as the Chinese government cracks down on online content and trust in its search and aggregation services among consumers wanes.

Nonetheless, the company on Friday reported solid revenue growth in the fourth quarter, while net income fell 50% year-on-year as the company sought to expand its content, artificial intelligence, and cloud computing offerings.

Total revenue reached more than RMB 27 billion (around $4 billion) during the quarter, up 22% year-on-year, but slowed compared with the same period last year.

Operating income slid 77% as the company increased spending on content, which included shows and films on video-streaming site iQiyi. Other expenses included those related to research and development, traffic acquisition, and promotional activities—including its “red envelope,” or hongbao, campaign over Chinese New Year.

“The diversification of Baidu’s business from mobile internet to the smart home, smart transportation, cloud, and autonomous driving markets will require heavy investments,” Baidu CFO Herman Yu said in a statement.

These investments, along with slowing quarterly growth in Baidu’s online marketing business, represent a broader turn from the consumer market as the Chinese economy sees its most significant slowdown in nearly 30 years. Rivals Tencent and Alibaba have also increased their focus on enterprise, while all three companies have restructured to counter challenges in the consumer sector—including increased regulation and competition in the content market.

In a note following Baidu’s earnings, Bernstein analyst David Dai listed declining users of the company’s search platform and advertisers migrating away from search, among others, as possible loss-making risks.

“We have entered a new stage in China’s internet where the population and penetration dividend has gone,” Baidu CEO Robin Li said during an earnings call on Friday.

Eyes on AI

In December, Li announced plans to restructure Baidu, upgrading its Artificial Intelligence and Cloud Computing Unit into a business group, as the company seeks to increase its focus on enterprise customers.

Following the move, Li told employees in an internal memo that the Chinese economy had “shifted to a lower gear,” and that the country’s firms were under “severe pressure from nationwide economic restructuring.” Li called for Baidu employees to decrease costs and improve efficiency for its business clients.

While the opportunity to pivot to enterprise-facing applications was always there, Chinese tech companies have been given an extra incentive following the slowdown in consumer spending, analysts told TechNode.

To boost revenue, company executives have been looking to deploy Baidu’s AI technologies beyond its consumer-facing search, feed, and smart assistant businesses to enterprise and government-led initiatives—including intelligent transportation and smart city projects. Baidu has already partnered with the municipal governments in Shanghai and Xiong’an, in the northern province of Hebei, among others, to provide their AI and cloud computing services to increase efficiency within urban areas.

“With the support of local governments, we see commercial opportunities to minimize traffic congestion, reduce pollution, and improving road safety,” Li said on the earnings call.

The company is also focused on self-driving vehicles. In 2018, China’s central government named Baidu one of five Chinese “AI Champions,” tasking it with spearheading the country’s autonomous driving development. In January, Baidu released a significant update to its self-driving platform, Apollo, enabling autonomous vehicles to navigate “complex urban and suburban environments.” At the same time, it also unveiled its Apollo Enterprise platform, designed for AVs that have been pegged for mass production.

Its Apollo program has been granted over 50 licenses for road testing in Chinese cities, including Beijing, Tianjin, and Chongqing. This year Baidu will roll out a fleet of robotaxis in the central Chinese city of Changsha.

Difficulties in the market

China’s internet regulator, the Cyberspace Administration of China (CAC), has targeted online service providers as part of a broad crackdown on “vulgar” content. The move has prompted Chinese tech companies to employ legions of moderators that they attempted to keep up with increasingly strict regulations.

Baidu hasn’t been immune to the campaign. Last month, the company said it had removed more than 50 billion “harmful” pieces of information in 2018, up 11% compared to the previous year. Baidu said the removals included content relating to pornography, drug use, gambling, and fraud. According to an annual content management report, the company intercepted 1,500 pieces of information per second.

But it wasn’t enough to appease regulators. In the same month, the CAC ordered Baidu, along with Sohu, to suspend a number of their news services for a week as part of a six-month campaign to clean up the Chinese internet. The company and the regulator didn’t provide further details.

Baidu has also faced scrutiny for its ad placement, leading to waning trust in the company’s search results following a 2016 incident in which a 21-year-old college student died of cancer due to ineffective treatment he had found through ads in Baidu search results.

This was followed by a similar incident last year. An internet user from Shanghai was directed to what she thought was the reputable Fudan University hospital through Baidu’s search results. She underwent an operation that cost tens of thousands of RMB at a similarly named institution. Following the procedure, she found her ailment could have been cured by medication costing RMB 200.

“I would see public sentiment as the biggest challenge Baidu faces,” International Data Corporation research manager Xue Yu told TechNode in an email, adding that difficulty in acquiring new users has increased the company’s traffic acquisition costs. “The negative impression of Baidu’s brand is still a major concern when people use apps,” he said.

The company was again subject to censure in January after it was accused of promoting its own results and low-quality articles on its content aggregator Baijiahao by Chinese journalist Fang Kecheng.

“Baidu no longer plans on being a good search engine. It only wants to be a marketing platform,” Fang wrote in an article. Baidu responded by saying that it would continue to improve its search results and content aggregator. The company also said just 10% of its results come from Baijiahao.