Here's How Baidu Plans to Stay Ahead of Qihoo

Baidu (NASDAQ: BIDU  ) is China's leading search engine, but its dominance is under threat. Baidu's share of the search engine market in China has been declining due to the emergence of Qihoo 360 Technology (NYSE: QIHU  ) , which is fast improving its advertising platform to attract more marketers. At the end of 2013, Qihoo commanded almost 23% of the Chinese search market. Baidu lead with a 63% share, down from the 72% share it had at the end of 2012. 

Qihoo plans to grab 35% of that market by the end of 2014. So, Baidu's market share might drop further. Let's take a look at what moves is Baidu making in order to stay ahead of the pack.

What's Baidu up to?
Baidu sees opportunity in five strategic areas: mobile and cloud, location-based services, consumer products, and international. In addition, it has invested in travel site Qunar and video content platform iQiyi to capture a bigger share of Chinese Internet users.

Baidu is trying to realize the potential of its broad ecosystem, which now spans media, social, online tools, and other verticals. The company is focused on building a cross-platform information gateway.

Driven by its different moves and strategies, Baidu is seeing encouraging progress in both PC and mobile search traffic. It is seeing robust growth, with its combined share of PC and mobile search page views in China standing at 73% in the first quarter. Mobile search was the main driver of page-view growth in the first quarter, and is expected to surpass PC as the biggest source of search traffic later this year.

Baidu is focused on improving its offerings and strengthening channel distribution. This led to an increase in daily active mobile search users from 130 million two quarters ago to 160 million in the previous quarter. On the product side, it is generating faster load speeds. Additionally, it has optimized ad formats on the search page, making click-to-call and click-to-download buttons, as well as location extensions more prominent. It has also introduced customized vertical results for health care, e-commerce, and education to mobile, which was previously available only on PC. 

Efforts to improve monetization and increase users
Baidu is trying to bolster cross-channel leads and improve monetization. The company's investment in advanced technologies, such as deep-learning and natural-language processing, has led to an increase in year-over-year revenue in paid clicks, click-through rates, and cost per thousand impressions. It also introduced a new feature to its bidding system, enabling more targeted ads to help drive higher returns for customers and a better experience for users.

Baidu's management says that it is receiving positive feedback from customers who are seeing strong returns from the mobile channel. The percentage of customers with mobile optimized landing pages is increasing, along with a rise in percentage of revenue from mobile landing pages and landing page quality. 

Baidu is also making solid moves in app distribution. By the end of 2013, Baidu surpassed 100 million app downloads on a daily basis in China. The company is also focused on other services such as the cloud. Its personal cloud storage product intended to provide a flawless user experience across devices is gaining strong momentum. The number of registered users jumped 60% to 160 million in the first quarter on a sequential basis.

Also, the total number of files uploaded more than quadrupled as users trusted Baidu Cloud with their files across a wide range of formats, from music playlists and videos to photos and documents.

Up against Qihoo
So, Baidu is primarily focused on mobile. This is the right thing to do as it fights Qihoo 360's increasing potency. However, Baidu will need to keep innovating, as Qihoo is expanding at a terrific pace. Qihoo's flagship mobile security product has close to 470 million smartphone users, covering around 70% of the Chinese smartphone market.

In addition, Qihoo's mobile monetization is moving at an impressive rate. In 2013, Qihoo's advertising revenue grew 88%, with desktop search accounting for 30% of its business. Qihoo has successfully taken away market share from Baidu in the last couple of years, and it is looking to improve upon its performance in 2014. It remains to be seen how successful Baidu's strategies will be at slowing down Qihoo's growth.

The bottom line
Baidu is trying hard to maintain its leading position in the Chinese Internet industry, but it needs to stay on top of its game to counter Qihoo. In such circumstances, Baidu's focus on mobile looks like a smart strategy as the number of smartphone users in China is growing rapidly. In addition, as the company is adding more features to its services, it might be able to ward off competition to some extent from Qihoo. Investors should continue having faith in Baidu, as it looks set to dominate the Chinese search market going forward.

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