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Baidu's Biggest Threat

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Brendan Byrnes: Hey Fools, I'm Brendan Byrnes and I'm joined today by Andrew Tonner, our tech and telecom analyst for

Andrew, let's talk Baidu, a big Internet search giant in China. I think we both own the stock, but let's take a look at a possible issue for them with mobile... what's going on here?

Andrew: Yeah, I am bullish on Baidu, and I do also own the company, but I think one of the things that people under-appreciate is how potentially big a threat mobile could be for them.

The question I was wondering, "Could mobile kill Baidu?" No, of course not, but at the same time some of the dynamics in the mobile market make profiting in search a relatively challenging proposition for companies.

We've seen some recent commentary come out about what's called the "traffic acquisition cost," and that's how much a search company pays another company to place its search engine somewhere. Think about the context would be, Google's search sidebar on the top of someone else's browser. Companies have to pay for that. That space isn't free, and it's extremely valuable.

Now, with other companies really owning the ecosystem -- and mobile as well -- and Baidu not having that same footprint, they have to pay up for that. It's apparently becoming an increasingly expensive proposition in mobile.

We've seen rough numbers that Google pays Apple, for its placement as the preferred search company in its browser on the Safari app in iOS, around 3/4 of overall search revenue. That's a huge hit on profitability and that's why we're seeing, while Google's growing its overall paid clicks at huge rates, the profitability just isn't coming along with that.

Baidu could face that same dynamic. I think right now, at least, if you look at Baidu the main case for buying it is it's just so cheap, relative to its overall opportunity, but a knock against that would be that in an emerging market like China -- where there is smartphone growth and desktop growth as well -- it's more common for people to sidestep accessing the Internet through a desktop device, and go straight to mobile.

We're seeing that as a pretty pervasive dynamic in a lot of emerging markets. If that's the case, and Baidu doesn't have prominent positioning, or has to pay up for prominent positioning in search sidebars, it could definitely erode margins as well.

Again, the overall opportunity is the huge thing to focus on in Baidu, relative to its pricing. I still think Baidu is a great buy but this is something, as I think more about the company, it does certainly scare me a little bit.

Brendan: OK, definitely something to keep an eye on, going forward at least. Thank you, Andrew. Make sure you head over to for more analysis.

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  • Report this Comment On January 10, 2013, at 1:39 PM, BabyBeluga2 wrote:

    BIDU and SINA have a mobile partnership. What are the implications of this partnership for the companies? Is SINA free of traffic acquisition costs? what do you think of what analysts describe as MVAS costs?

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