Is This Baidu, Inc.'s Biggest Risk?

Chinese search engine Baidu's (NASDAQ: BIDU  ) name comes from a Song dynasty poem that tells of exhaustively searching for a lover during a chaotic festival, only to finally turn around to find her in a dim light. For Baidu, it seems more and more users are turning to competitors to search for lovers, among their other searches. The historical top dog's position is eroding, and this could very well be Baidu's biggest threat.

Chinese mobile phone users. Source: Flickr user Cory M. Grenier.

Baidu's crumbling dominance in China
Baidu always draws comparisons to Google  (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) , but whereas Google has a seemingly indestructible moat, Baidu is much more assailable. For those of us under Google's market share, we aren't used to turnover in Internet services. Many of the battles were already fought when the Internet was just starting out, with the latest big disruption outside of mobile being Google Chrome's introduction as a browser.

This isn't all Baidu's fault, but simply the dynamic user market in which it operates. Whereas in 2012 more than 80% of Americans used the Internet, only 42% of Chinese used the Internet. Higher Internet penetration forces the competition to steal share as opposed to just grab new users as they come online. The Chinese market right now is much more friendly to new entrants because it's much easier to grab a new Internet user as opposed to one who is accustomed to a different service. Just how easy?

Baidu had 71% of Chinese search market share at the beginning of 2013. In May, that number was 60% according to CNZZ. On the other hand, Qihoo 360 Technology's (NYSE: QIHU  ) search share climbed from 10% to 25% during that time, with a search engine they debuted in the summer of 2012. Qihoo has a plan to reach 35% market share by the end of this year.

Compared to the stagnant American market, Google's market share has hovered around 67% for years, trading single-digit variances with competitors.

How Baidu or Qihoo will win
The obvious strategy for either company will be to grab on to mobile users. Qihoo's main mobile offering is something Americans are unfamiliar with -- mobile security software. A total of 538 million smartphone users had Qihoo's security software in March, compared to 275 million the previous year. Qihoo also has an Android app store, 360 Personal Assistant, with 400 million users.

Baidu recently reported 160 million daily active search users and 190 million monthly active map users. It also bought 91 Wireless, a mobile app store, last year for $1.9 billion.

These numbers just show the playing field is very level, especially because there are so many new smartphone customers in the coming years. In 2014, Gartner expects 440 million smartphones to be sold in China to end the year at over 1 billion total mobile phones. Grabbing the new customers will be even more important than converting those who already own mobile devices.

The threat to Baidu
As it fights an underdog, it seems that any share Baidu loses will weigh on its stock. Qihoo, meanwhile, demonstrates just how dynamic a young Internet industry can be, and could capitalize on the growth in these next few years to solidify its position among China's tech titans.

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Dan Newman

Writing for the Fool since 2011. Interested in technology, the future of society, and how both overlap.

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