Baidu's (NASDAQ: BIDU ) mobile traffic has exploded over the past few years, but like most tech companies, the Chinese search leader is fighting to find ways to benefit from its mobile presence. Baidu's mobile innovations could have big payoffs, but investors need to be patient.
Mobile traffic is on the move
Baidu, China's largest web search company, has seen mobile web traffic increase by over 1,000% in the past three years. It's not just by chance, or because of the growing popularity of mobile, that the company has seen this growth. Baidu is investing heavily in its mobile products, like its new mobile maps app and updated mobile browser that supports voice-enabled search.
In the last quarter of 2012, the company invested 25% of its research and development budget in its mobile products. The investment of time and money into mobile has paid off in traffic for Baidu -- 80 million active users use its mobile products every day -- but mobile revenue is elusive.
Mobile now, revenue later
Success in mobile is more than just traffic, though, and Baidu is still learning how to make money from its mobile success. The placement of mobile ads and how frequently a user should see them can make mobile advertising a tricky business to get right. Baidu isn't alone in experiencing this. Facebook (NASDAQ: FB ) has had a hard time making money from mobile until recently. This past quarter, ad revenue from mobile accounted for 23% of Facebook's total ad revenue, compared to 14% in the previous quarter. Facebook took a temporary hit in profits to achieve this, though, with Q4 2012 profits dropping 79%. Facebook knows that to succeed in the mobile space, companies need to spend lots of money now if they want to see big gains later.
Google (NASDAQ: GOOGL ) has hit similar barriers with its mobile search advertising. Google said in a 10-Q filing late last year that its mobile ads are causing "a deceleration in the growth of desktop queries." To combat its problems with mobile advertising, the company recently simplified its mobile ad selling processing. Advertisers can now view additional ad data and manage desktop and mobile ad campaigns from one unified system. Some analysts believe Google's integration of desktop and mobile ad campaigns will help fuel additional mobile ad spending and close the gap between desktop and mobile ad revenues.
Right now, Baidu's mobile business represents only 10% of its overall revenues. Obviously, that's not going to stay there for long. The company has worked with smartphone makers and wireless carriers to get its search function into the hands of more Chinese consumers. But setting up new mobile apps and improving existing ones are investments that will take time to mature. That's why Baidu Chairman and CEO Robin Li said that it could be two years before the company sees significant gains from its mobile revenues.
Investing in the future
Baidu has been in the Internet game for more than 10 years, and it's learned a thing or two about Chinese Internet users and advertising. In Q4 2012, the company's revenue increased 42% year over year and its advertising client base grew by 30%. Baidu has also seen the average spending per paid search customer increase each quarter since late 2009. The company also has about 78% of search advertising market share in China by revenue.
Investors should see all of this as a positive sign for the company, even as it tries to find its way with mobile. Baidu has a very recognizable brand in China, and the company should be able to leverage its current mobile products and its search business into a strong mobile revenue generator. The company needs to watch out for rising competitors like Tencent, Sohu, and others who could eat into its web and mobile advertising space.
Baidu is making every effort to get mobile right, and its opportunities in the world's largest mobile market are enormous. To help investors understand Baidu's opportunity, we've put together a brand-new premium report that breaks down the dominant Chinese search provider's strengths and weaknesses. Just click here to access it now.