Baidu practically owns search in China, controlling nearly 80% of the sector. Its closest competitor, Sogou, holds just 11%. There’s just one problem: web search isn’t the cash cow it used to be, and Chinese internet users now spend more time in apps.
Advertising revenue is the primary source of income for search companies, and Baidu’s ad business has seen growth slow to a crawl over the past few years, with a few quarterly exceptions. The AI giant has been hamstrung by the decline of web search, rising competition from rivals like ByteDance and Alibaba, and accusations of bad behavior like prioritizing its own search results and allowing ads for questionable medical treatments.
The company is trying a full-blown pivot, even telling people it’s no longer a search company. The story it’s telling now is about AI.
“As we enter 2021, Baidu is well positioned as a leading AI company with a strong internet foundation to seize the huge market opportunities in cloud services, autonomous driving, smart transportation, and other AI opportunities,” Baidu CEO Robin Li said in the company’s fourth-quarter earnings report.
And it could be working. Baidu’s new businesses have grown and the company’s investments in new technologies are starting to mature. In 2018, non-ad revenue made up just 17% of its sales. Now, more than a third of the company’s revenue comes from its other businesses, including enterprise services like AI cloud and its consumer-facing smart speaker business.
Bottom line: Baidu really is changing. It still gets most of its revenue from search and advertising, but cloud services are driving growth and now account for a substantial part of revenue. The company’s long-term plays on AI and autos could pay off in a few years.
Search in decline
Beginnings in search: Founded in 2000 as a search engine, Baidu quickly became a household name, growing alongside China’s ballooning internet population. At the time, there were just 22 million internet users.
Ten years later, that number was nearly 460 million—and Baidu’s search business was booming. Between 2009 and 2010, the company’s ad sales increased by nearly 75% to reach RMB 7.9 billion.
Along with Alibaba and Tencent, Baidu was synonymous with big tech in China: the three companies were collectively known as BAT, much like FAANG—Facebook, Amazon, Apple, Netflix, and Google—in the US.
A staggering giant: But in the last few years growth has mostly slowed. In 2020, Tencent overtook Baidu in digital ad revenue for the first time, according to market research firm eMarketer. Analysts now typically count Baidu out of the tech major leagues in China, even proposing that ByteDance replace the company in the BAT triumvirate.
- “Baidu has had trouble attracting search ad dollars,” eMarketer forecasting writer Ethan Cramer-Flood, wrote last year. “Advertisers are showing that they increasingly prefer the reliability of Alibaba’s platforms for their search spend,” he said, referring to the ads Alibaba serves directly on its e-commerce platforms.
- The company has faced a slew of challenges, including issues of trust, decreasing dividends as the number of new people using the internet slows, and increased competition from rivals.
Slowing search: Web search in general has declined, and information is often confined within apps. Internet users now engage more with content in WeChat, Xiaohongshu, and Douyin.
- Instead of using search engines to find information on the internet, users spend more time looking for information in WeChat, browsing products on social networks and livestreaming platforms like Douyin and Xiaohongshu, and services on Meituan. There’s just not a lot of profitable search left.
In the first quarter of 2019, Baidu reported a quarterly net loss for the first time since it went public in 2005.
- “Given the current macro conditions, tighter government scrutiny on content, cutbacks from the VC community and so forth, we are taking a cautious view that online marketing in the near term will face a more challenging environment,” Li said during the company’s Q1 2019 earnings call.
- In the second quarter of the same year, the company’s revenue growth flatlined. Since then, with the exception of the first quarter of 2021, the company’s revenue growth has stagnated or declined.
- Baidu, like many others in China, was hit by the Covid-19 outbreak at the beginning of 2020.
Advertising’s not out: While the proportion of revenue that comes from advertising has shrunk, it still currently makes up the majority of Baidu’s total—and search encompasses a large part of that.
The company currently makes money by selling ads that get displayed with search results or on other platforms like newsfeed and search app Baidu App and Reddit-like community platform Baidu Post.
The company’s mobile ecosystem, which includes Baidu App, user-generated, medium length video platform Haokan, and Baidu Post, is a large driver of its growth, Baidu said in its Hong Kong IPO prospectus.
- “We generate revenue primarily from providing search, feed, and other marketing services, which account for a majority of our total revenues,” Baidu said in the prospectus.
- Baidu App had 544 million monthly active users in December. The app aggregates content and services from third-party apps and websites.
Seeking new growth
Baidu is betting on two new areas to secure growth: cloud services; and “other” initiatives, including intelligent driving, mapping, smart devices, and AI chips.
Li said that non-ad businesses, including cloud and its other growth initiatives, could become its primary source of income over the next three years during Baidu’s May earnings call.
Baidu, the cloud company? Cloud services drive a major portion of Baidu’s current growth. The company restructured in 2018 to place greater emphasis on cloud computing and artificial intelligence. In an internal note at the time, Baidu’s Li wrote that the company sees these businesses as the cradle of “new growth engines.”
- The company provides several cloud products, including storage space, computing power and cloud-based software services, as well as several AI and big data products for speech recognition and synthesis, facial recognition, and image recognition.
- Collectively, these platforms allow developers and companies to access computing and power and storage that can process information that they might not be able to handle on their own computers or servers.
- Baidu’s AI cloud services also give users access to AI tools and components and pre-trained machine learning models.
- At the end of 2020, Baidu was China’s fourth largest public cloud provider, according to market research firm Canalys, driven by growth in government, enterprise, transportation, and healthcare sectors.
- The company has attributed much of its non-ad business growth to its cloud business. In the first quarter, revenue from its non-ad businesses was up 70% year on year, driven primarily by “cloud and other services,” Baidu said.
- Revenue from AI cloud reached RMB 2.8 billion, up more than 50% year on year, equivalent to half of the company’s non-ad revenue for the quarter.
What’s next for Baidu?
Push for AI: Baidu has invested heavily in AI since 2010, hoping that it will propel future initiatives like intelligent and autonomous driving. The technology is currently used in the majority of the company’s products, including its cloud and search businesses.
- Baidu has more AI patents than any other company in China, according to a report by the China Industrial Control Systems Cyber Emergency Response Team and the Electronic Intellectual Property Center, two units under the Ministry of Industry and Information Technology.
- The company released an open source deep learning platform called PaddlePaddle in 2016, a framework to rival Google’s Tensorflow and Facebook’s PyTorch. In April, it released PaddlePaddle 2, an updated version of the framework. Paddle Paddle has been forked 4,000 times on Github, while PyTorch has been forked 13,500 times.
- Baidu has also released natural language processing framework Ernie, a technology that helps computers understand and process speech.
Taking on chips: AI is only as effective as the hardware it runs on. In 2018, Baidu announced that it was developing its own AI chip.
- By 2019, Baidu’s first chip, dubbed Kunlun, was being used in its cloud servers to optimize “visual, speech, natural language processing, and other AI capabilities.”
- The company has since been developing the Kunlun 2, and spun off its chip unit.
- In April the unit completed its first round of financing, valued at $2 billion.
- Baidu’s AI chips are also used in its automotive businesses, including intelligent and autonomous driving.
Future mobility: Projects related to autonomous vehicles and robotaxis make up a significant portion of Baidu’s bet on future revenue. The company hasn’t yet made its own cars. Instead, it’s been focusing on a self-driving package called Apollo it hopes other automakers will license and put in their own vehicles.
- Baidu has been testing Apollo on China’s streets for years. The company has accumulated 4.3 million test miles and been granted 199 autonomous driving licenses, as of December 2020.
- The company has signed agreements with 10 Chinese automakers to deploy its Apollo self-driving services in their cars.
- These services currently include high definition mapping, automated valet parking, and semi-autonomous driving. As the technology matures, Baidu hopes to extend Apollo to include fully autonomous capabilities.
- Apart from partnering with companies, Baidu has also teamed up with several local governments to provide robotaxi services, including southern China’s Guangzhou, Beijing and nearby Cangzhou, as well as Changsha in central Hunan province, and the southwestern municipality of Chongqing.
- The company hopes that its early lead in autonomous driving in China will help it become a frontrunner in commercializing the technology.
Bets on electric: Baidu is also making moves into China’s crowded electric vehicle industry. In April, the company partnered with automaker Geely to produce smart EVs.
- The joint venture, dubbed Jidu, plans to spend RMB 50 billion over the next five years to develop smart car tech.
- The two companies plan to launch their first vehicle in the next three years, Bloomberg reported.
- “Partnering with China’s largest homegrown auto brand might help Baidu expand its ecosystem as it competes with other internet giants like Tencent and Alibaba,” Bloomberg Intelligence analysts Steve Man and Joanna Chen wrote.
Is the pivot working?
So far, so good: Since the company has decided to go all-in on AI, its year-on-year growth has increased dramatically, but this may also be as a result of China’s Covid-19 recovery.
- First quarter revenue reached RMB 28.1 billion, up 25% year on year. Nevertheless, the company’s revenue from the first quarter of last year was down significantly as a result of the fallout from the Covid outbreak in China.
- At the same time, Alibaba saw its revenue grow by 22% and Tencent grew 25%.
- Baidu CFO Herman Yu attributed the growth to “non-advertising revenue growing 70% year over year.”
- On an earnings call, Yu said that the company’s AI businesses have started to mature and generate revenue. “You’re seeing us really starting with our firing power for our non-advertising AI businesses that we have incubated over the last decade,” he said.