Alphabet's (GOOG 1.35%) (GOOGL 1.33%) Google, the world's leading search engine, left mainland China in 2010 after alleging that the Chinese government had hacked the Gmail accounts of numerous human rights activists. That departure handed China's search market to its rival Baidu (BIDU -0.13%).
But over the past 12 months, Alphabet's stock rallied nearly 30% as Baidu's tumbled more than 30%. Alphabet impressed investors as its core advertising business continued generating double digit revenue growth, while Baidu's growth slowed to a crawl amid China's economic slowdown and competition from rival ad platforms.
Those results suggest that it was wise for Google to step away from China and that Baidu -- the "Google of China" -- was a weaker investment than the original. However, a closer look at Google reveals many of the same red flags as Baidu and indicates that it could eventually suffer the same fate as its Chinese counterpart.
Disruptive competitors at the gate
Baidu still controls nearly two-thirds of China's online search market, according to StatCounter. However, many internet users in China are starting their searches on other platforms -- like Tencent's WeChat, Sogou's voice search app, ByteDance's Toutiao news app, and Alibaba's marketplaces. As a result, Baidu now ranks third in China's digital ad market by revenue, according to research firm R3, putting it behind Alibaba and ByteDance.
Google faces similar challengers, including social networks like Facebook (META -0.54%) and e-commerce platforms like Amazon (AMZN 1.41%). Google repeatedly failed to crack both the social media and product search markets, and it remains far behind Amazon in the smart speaker race.
Google and Facebook remain the top digital ad platforms worldwide, but Amazon is quickly gaining ground. It already became the third-largest ad player in the U.S. last year, according to eMarketer, and its share could grow from 7.6% in 2019 to 8.6% in 2020 as Facebook and Google's "duopoly" share dips from 60.9% to 60.7%.
Google isn't besieged by as many competitors as Baidu yet, but its weak positions in the social, mobile messaging, e-commerce, and voice search markets could leave it vulnerable to rivals like Facebook, smaller social networks like Snap, and Amazon.
A massive target for regulators
Three years ago, the Chinese government forced Baidu to suspend its healthcare-related ads after the death of a Chinese student who bought unapproved cancer treatments from a sponsored search result. Subsequent crackdowns on the gaming and fintech industries also throttled ad spending from those growing markets.
Earlier this year, Chinese regulators forced Baidu to suspend its news apps to clear out offensive content and remove over a billion inappropriate ads from its search platform. Those demands exacerbated the ongoing slowdown in Baidu's advertising business.
Meanwhile, Google isn't being targeted by a single regulatory body -- it's being hit by antitrust and privacy probes all over the world. In Europe, it was fined $5 billion last year for bundling its first-party apps with Android, $1.7 billion in the EU earlier this year for using "abusive" advertising strategies in its AdSense ecosystem, and over $1 billion in France over tax evasion charges.
In the U.S., Google faces a new antitrust probe led by 50 state attorneys general, a new DOJ probe regarding its proposed takeover of Fitbit, and persistent calls for the company to be broken up. These regulatory headwinds haven't halted Google's streak of double-digit sales growth yet, but they could reduce its competitiveness in certain markets, throttle its margins, and make it tougher to retaliate against rivals like Amazon.
A scattershot strategy for the future
Baidu is expanding beyond its core search engine in several clear directions, including AI and voice search, connected cars, mini-programs, and its cloud platform. It also streamlined its business by dumping non-core assets like its fintech unit.
Google is also invested in driverless cars, cloud platforms, AI, and voice search, but its parent company is also expanding in wild new directions -- including healthcare, e-commerce, and even internet-beaming balloons. It also frequently launches half-baked products -- including Google+, Google Stadia, Google Play Pass, and myriad messaging apps -- without adequate support or long-term growth plans.
Alphabet's investments in these scattershot bets aren't throttling its cash flow yet -- its cash, cash equivalents, and marketable securities still rose from $109.1 billion at the end of 2018 to $121.2 billion in the third quarter. However, they indicate that Alphabet doesn't have a clear-cut plan for the future and that it could become increasingly difficult to convince its users or partners to adopt its new products if they're destined to disappear.
The key takeaways
Google won't suffer the same fate as Baidu yet, since it has superior scale, dominates multiple key technologies (including the world's top search engine, web browser, and mobile operating system), and is better diversified across multiple countries.
But Google isn't infallible, and its weaknesses have become increasingly visible in recent years. It could struggle to stay relevant over the next few decades if it doesn't counter rivals like Amazon, continues abandoning poorly conceived products, and attracts more attention from regulators.