Most Snap (NYSE:SNAP) investors likely recognize Chinese tech giant Tencent (OTC:TCEHY) as one of the company's top stakeholders. Tencent was an early investor in Snap prior to its IPO and paid about $2 billion to boost its stake to 12% in late 2017.
However, it's likely that fewer investors remember Snap's partnership with Tencent's rival Baidu (NASDAQ:BIDU), which owns China's top search engine. That partnership, which was launched two years ago, allowed Baidu to resell Snapchat's ads in China, Japan, and South Korea.
The two companies recently renewed that partnership, but they didn't reveal any details about how the revenue was split or when the renewal would expire. Let's take a closer look at this oft-overlooked partnership to see how it might benefit the two companies.
How this partnership helps Snap
Snapchat, like other major U.S. social networks, is blocked in mainland China. However, those tech companies are still allowed to sell ads to Chinese companies that want to expand overseas.
Facebook (NASDAQ:FB), for example, runs an ad office in Shenzhen. That business turned China into Facebook's second-largest ad market after the United States according to Pivotal Research Group.
The firm estimates that Chinese companies spent $5 billion on Facebook ads last year, which would account for more than half of its Asia Pacific ad sales and 9% of its top line. However, the actual percentage is likely lower since Facebook splits that revenue (by an unknown amount) with nine ad representatives in China.
Snap has two units in China: an R&D center in Shenzhen for Spectacles, and an ad office that caters to game developers, e-commerce merchants, and other companies that want to reach overseas customers. By partnering with Baidu, Snap's ads gain exposure to the search giant's massive advertising network. It also gains Baidu's local language support and account management services, which mirrors Facebook's partnerships with its ad representatives.
Joe Zhou, CEO of AjMall, a Chinese e-commerce company focused on the Middle East, stated that Snapchat's "highly effective ad products and roughly 21 million addressable users in the Middle East" helped it scale its business "extremely quickly." Chris Zhang, VP of Chinese game developer Lilith Games, claimed that Snapchat's "young, vibrant user base" helps the company "acquire extremely relevant, high-quality users."
Snap didn't mention those success stories in its latest conference calls, but Baidu could funnel a significant number of Chinese ads to Snapchat's users -- which could boost its average revenue per user (ARPU) as its daily active user (DAU) growth slows down. Snap's DAUs dipped 1% annually to 190 million last quarter, but its ARPU rose 39% as it displayed more ads to locked-in users.
How this partnership helps Baidu
Baidu generated nearly three-quarters of its revenue from ad sales last quarter. That revenue rose just 3% annually during the quarter, marking a major slowdown from its double-digit growth in previous quarters.
That deceleration was mainly attributed to the slowdown in China's economy and competition from rival platforms like Tencent's WeChat. Baidu is trying to reduce its dependence on ads by expanding its ecosystem of Mini Programs inside its mobile app, investing in next-gen platforms like smart speakers and connected cars, and buying more content for its video streaming platform iQiyi.
But those efforts, along with a marketing misfire on Chinese New Year, caused it to post its first quarterly loss. Therefore fresh advertising deals, especially those that target overseas markets, could shore up its ad business until China's domestic economy recovers.
Baidu reportedly also wanted to resell Facebook's ads, according to TechCrunch, but wasn't granted a license -- possibly because it wanted a bigger slice of the revenue than Facebook's smaller partners. If that's true, Baidu could be retaining a significant chunk of Snapchat's ad revenues in China. (Editor's note: Baidu disputes TechCrunch's account and says that Facebook approached it about selling Baidu's ads and was rejected.)
But will it move the needle for either company?
Snap and Baidu's partnership sounds like a win-win deal, but it's just a renewal of a two-year deal. Both Snap and Baidu experienced slowdowns since the initial deal was announced, so it seems doubtful that it moved the needle for either company.
However, Snap's expansion into new countries, its focus on older users, and the expansion of its ecosystem with new features (like Snap Originals and games) could broaden its appeal for Chinese advertisers and eventually unlock fresh growth opportunities for both companies.