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Social may soon become Baidu's (NASDAQ: BIDU ) Achilles' heel in search, mobile, and more.
For some time, China's largest search engine could always count on its partnership with SINA (NASDAQ: SINA ) Weibo, a Twitter-like service, to infuse Baidu products with social information. But now that China's biggest e-commerce retailer Alibaba has bought shares in Weibo, Baidu investors should be scared. Not only may Baidu lose its social edge, but the Alibaba-SINA deal could also spell trouble for Baidu's future.
What Alibaba sees in Weibo
In late April, Alibaba bought an 18% stake in Weibo that valued just the Twitter-part of SINA's businesses equal to the company's entire market cap -- $3.3 billion. That's huge. Currently, the market cap is $3.7 billion-meaning that Weibo still accounts for 89% of SINA's value, even as SINA earns revenue from businesses like its online portal. You might think that's outrageous, but it's not.
Whether your read about SINA from a Western or Eastern source, SINA has become synonymous with its Weibo service and vice versa. While other Internet conglomerates, like Tencent and Netease, also have Weibo platforms, SINA's still seems to be the most popular among the Chinese. That's why Apple's mobile operating system has SINA Weibo pre-installed in China.
And as more and more Chinese come online through mobile, SINA Weibo growth will skyrocket. Currently, there are about 564 million people on the Internet. While only 31% accessed the Internet through a mobile phone in 2012, that number is sure to grow quickly -- especially because there are over 1.1 billion people with access to mobile phones.
With more users on its platform, Weibo has plenty of opportunities ahead of it -- and Alibaba knows that. Over the next three years, Alibaba expects its partnerships will net about $380 million in advertising and commercial revenue. How might this play out?
If it's any indication, SINA Weibo has shown its potential to sell physical goods. Back in December, Weibo ran an e-commerce test with the Xiaomi -- a stylish, smartphone manufacturer. In the experiment, Xiaomi let people reserve for one of their new phones by tweeting. The result? In less than five minutes, Weibo was bombarded with 1.3 million Xiaomi phone reservations!
If similar experiments go well for Alibaba, then the e-commerce giant has the option to buy up to 30% of Weibo. And, who knows... Alibaba may swallow the company whole in the future.
All this would be bad for Baidu.
How Aibaba-SINA could end Baidu
Like Google with Google+, Baidu has tried to bolster its products by adding social information from SINA Weibo. Since July 2012, Weibo has been integrated into Baidu's mobile operating system and cloud services in what seems to be an effort to keep search and non-search competitors at bay.
Unfortunately, China's tech landscape seems to be converging. You may have heard that Ailbaba has moved into the search and mobile space. And Baidu should be scared.
If you don't think these products are a big threat to Baidu, look at it this way: At its simplest level, Alibaba lets Chinese merchants sell their goods online on its e-commerce websites. Meanwhile, Baidu lets merchants advertise products online. If Alibaba's search engine and mobile operating system can grow into a formidable business, then there'd be little need for merchants to leave the suite of Alibaba services and advertise on Baidu.
That's where SINA Weibo comes into play. While Weibo may seem to only be helping Alibaba sell goods on its social network, the Alibaba partnership could become something more. Weibo could eventually become Alibaba's social arm. If that happens, then Baidu would probably sever its ties with SINA. In the end, Alibaba will gain the social data needed to bolster its mobile OS and search engine to take on Baidu. And, given that Alibaba has a clear size advantage – its market cap may be as high as $120 billion – social may be all Alibaba really needs to crush the $33 billion business that is Baidu.
Should you bet against Baidu?
While it's certainly possible that this Alibaba-SINA deal could be the end of Baidu search, I don't think that'll happen anytime soon. Alibaba is a big company, but it's still an e-commerce one at heart.
It's expansion into search and mobile OS, and its stake in Weibo, is cause for concern; but don't forget that Baidu has been in the search business for over a decade. That's a big competitive advantage for Baidu.
For now, I think you should hold onto your Baidu shares, but be wary. Tech is a fast-changing sector, and whatever new moves Alibaba and SINA make may be all they need to take out Baidu.
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