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Baidu Inc. Investments in Video Are Already Paying Off

By Adam Levy - Mar 13, 2014 at 12:45PM

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Baidu surpassed Youku as China's top online video platform. Next stop, revenue growth.

Baidu ( BIDU 1.52% ) surpassed Youku (NYSE: YOKU) to become China's largest video streaming platform in January, according to iResearch. Baidu's properties iQiyi and PPStream attracted 94 million monthly users compared to Youku's 83.5 million. This comes just a month after the search giant partnered with Singaporean based Viki to license its popular content.

Baidu's push for video dominance is certainly paying off as it attracts more eyeballs. Moreover, the revenue opportunity from video is far greater than standard display. For proof, take a look at the search ads in the U.S. market -- where Google ( GOOGL 2.87% ) dominates. Growing its video platform through content deals like the one with Viki and mobile app investments could help Baidu better monetize its mobile users.

The opportunity
As mentioned, Baidu attracted 94 million viewers to its video platform in January. That's now well ahead of Youku, but in comparison to YouTube it's just a blip on the radar. YouTube receives over 1 billion unique visitors every month -- 200 million from the U.S. alone.

Growth in online video ad spending is rapid in both the U.S. and China. Last year, advertisers spent $4.18 billion on online video ads in the U.S. That number is expected to nearly triple over the next five years. In China, spending is growing even faster, albeit from a smaller base of approximately $2.1 billion.

There are big bucks in video advertising for several reasons. First, the format is more dynamic, allowing advertisers to communicate a stronger message than a display ad. Second, they're hard to ignore completely, unlike search ads that can be skipped over by users. Lastly, some companies invest large amounts in television ads, and will pay to get those ads in front of as many eyeballs as possible.

YouTube generated an estimated $4.36 in revenue per user in the third quarter last year. Youku generated approximately $1.76 per user in the fourth quarter based on iResearch's numbers. Baidu, with its data on web users could monetize its viewers even better.

The mobile push
Both Baidu and Youku have been pushing to better monetize mobile users. Last quarter, Youku derived 10% of total revenue from mobile while Baidu pushed it to 20%.

Baidu is investing heavily in mobile during 2014, and part of that will be for iQiyi. Not only does Baidu plan to increase spending on content acquisition, it also plans to spend to get its apps pre-installed on mobile devices -- whether that includes iQiyi is unclear.

Mobile video is a booming sector in China, as the smartphone market continues to expand. Youku's CEO mentioned that mobile viewership is already bigger than PC viewership. As China's mobile infrastructure improves, particularly with the rollout of 4G in 2014, mobile viewership is only going to continue climbing.

Another area outside of PCs where online video viewing is growing substantially is in smart TVs. New entrants from big names like Xiaomi and Alibaba led to a 50% growth in shipments after 100% growth in 2012. Baidu is capitalizing on the trend by partnering with manufacturer TCL to feature its custom OS and iQiyi.

The ability of Baidu to put its video platform front and center on two screens, both of which are growing in popularity, will allow it to better capture new viewers for a very lucrative business. Attracting a larger audience, will allow it to buy better content and expand internationally as well -- much like Netflix. In the meantime, unlike Netflix, it has several other verticals to support the investment.

Watch this one
Baidu's management expects its profits in 2014 to come in flat compared to last year, but revenue is expected to continue climbing. iQiyi and PPStream will contribute a significant portion of that revenue growth as video ad rates climb and Baidu attracts more viewers, but Baidu will need to continue investing in content and its mobile apps. Priced at nearly 12 times sales, it's certainly priced for further revenue growth (Google is trading for just 6.75 times sales, Youku at 10.77 times), but Baidu is capable of delivering it.

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.

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