I heard something very interesting when listening to Google's (Nasdaq: GOOG ) conference call, and I heard it again on Baidu's (Nasdaq: BIDU ) earnings call. It's that mobile search is mostly incremental to desktop search.
This is a key insight because many investors mistakenly believe that mobile search is cannibalizing the much more profitable desktop search business of these two Internet giants. However, both Baidu and Google said that this is not the case. Google's management explained that desktop search takes place most often during the weekday, while mobile search is more prevalent on the weekends. Intuitively, this makes sense, as one would think that people are more likely to use desktop search when they're sitting at their desks at work and school, and more likely to use mobile search (on their phones and tablets) when they're out and about on the weekends. Going forward, investors need to keep this in mind when attempting to determine the long-term market potential for online search. And when they do, I believe the growth estimates for both Baidu and Google will need to rise accordingly.
In regards to the last point, the reason why many investors are concerned about the rapid growth of mobile search is that mobile ads currently earn much lower revenue per click. But Baidu's management said something very similar to Google in that mobile search is where desktop search was many years ago (Google put it at 1999). The point being that there is tremendous room for growth in both the number of mobile ads and the average revenue per mobile ad, with local mobile search in particular having great potential. So not only is mobile search mostly incremental to desktop search, but the revenue per click rates for mobile search also stand to rise substantially in the years ahead.
The Foolish bottom line
Online search is a great business for market leaders due to the mostly winner-take-all competitive dynamics of the industry. Baidu and Google are already as dominant as they come in their respective core markets, and now, due to the two factors I described earlier, I believe that the future for both Baidu and Google is even brighter than I originally thought. I will be studying Baidu intensely in the days and weeks to come, with the hopes of adding it to the Tier 1 Real-Money Portfolio. And tomorrow, I will be increasing Tier 1's position in Google.
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