In an effort to expand its streaming video ecosystem, Baidu (NASDAQ:BIDU) could soon acquire JOYY's (NASDAQ:YY) Chinese operations, according to the digital media outlet Jiemian. JOYY will reportedly retain its larger overseas business.

JOYY's global average mobile monthly active users (MAUs) grew 21% year-over-year to 457.1 million last quarter. But 91% of those MAUs were outside of China, so Baidu would only gain a small slice of its business.

JOYY's core platform in China, YY, hosted 41.2 million mobile MAUs last quarter -- up 6% from a year ago. However, YY's number of paid users fell 2% year-over-year to 4.1 million, mainly due to the COVID-19 crisis.

Three young women stream a live video on a smartphone.

Image source: Getty Images.

Why does Baidu want YY?

Baidu owns the largest search engine in China, but its advertising revenue has fallen year-over-year for five straight quarters.

It attributed its lower ad sales, which accounted for 68% of its top line last quarter, to the economic slowdown in China, the ongoing U.S.-China trade war, and competition from rival platforms like Tencent's (OTC:TCEHY) WeChat and ByteDance's Douyin (known as TikTok overseas).

The decline of Baidu's core advertising business forced it to rely more heavily on the growth of its streaming video platform iQiyi (NASDAQ:IQ). But iQiyi remains unprofitable, and the higher mix of iQiyi's revenue weighed down Baidu's margins and earnings.

To counter that slowdown, Baidu is expanding its ecosystem beyond its core search engine. It added Mini Programs, which closely resemble Tencent's Mini Programs on WeChat, to its mobile app, which hosted 204 million daily active users (DAUs) last quarter. And it expanded its virtual assistant, DuerOS, to more smart speakers and third-party hardware devices.

To chase Douyin in the short video market, Baidu launched a similar app called Haokan. Haokan topped 110 million DAUs in late 2019, but it's still dwarfed by Douyin's 600 million DAUs in China. Therefore, it isn't surprising to see Baidu buy smaller streaming video players, like YY, to complement Haokan's growth.

Unfortunately, gaining YY's 41.2 million MAUs probably won't significantly tilt the scales in Baidu's favor. JOYY doesn't disclose YY's revenue separately, but it likely represents a drop in the pond for Baidu, which generated more than four times as much revenue as JOYY last quarter.

Another major deal for JOYY

JOYY's overseas platforms are all growing faster than YY. Bigo Live's mobile MAUs rose 41% year over year to 29.4 million last quarter. HAGO's mobile MAUs rose 25% to 31.7 million.

A woman plays a streaming video on a laptop.

Image source: Getty Images.

Its short video app Likee, which App Annie ranked as the seventh-most-downloaded app worldwide last year, grew its mobile MAUs 86% to 150.3 million. Its IMO video conferencing platform hosted 204.4 million mobile MAUs.

It's obvious why JOYY would keep those businesses and sell YY to Baidu.

JOYY also ceded control of Huya (NYSE:HUYA), one of China's top game streaming platforms, to Tencent earlier this year. Tencent subsequently merged Huya with its rival Douyu to dominate the e-sports market.

Reducing its exposure to Huya enabled JOYY to focus on expanding its overseas platforms and reduce its dependence on China's saturated (and heavily regulated) live video market. Selling YY to Baidu clearly complements that long-term strategy.

But ByteDance probably isn't worried

Baidu's iQiyi is one of the largest freemium video streaming platforms in China, but it mainly streams TV shows and movies. But Baidu still hasn't cracked the short video and content creation market, which ByteDance dominates with Douyin, its news platform Toutiao, and other Gen Z-oriented apps.

In short, ByteDance probably isn't losing any sleep over Baidu's Haokan, its content creation platform Bajiahao, or its rumored buyout of YY. Instead, those moves merely highlight ByteDance's strength in China, even as it faces potential bans in overseas markets.

As for a deal between Baidu and JOYY, it would likely help the latter more than the former. Baidu would merely gain YY's slow-growth platform, while JOYY could streamline its business and pump that fresh cash into its higher-growth overseas businesses.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.