Baidu (NASDAQ:BIDU) is well-positioned to take advantage of a secular shift in power from old-media companies to those that are able to capitalize on online media advertising.
Baidu's flagship website is, according to the company's latest annual report, "the largest website in China and the fifth largest website globally, as measured by average daily visitors and page views during the three-month period ended December 31, 2014." It has used the power and reach of its site to become, according to a recent report from ZenithOptimedia, the 14th largest media owner in the world. This is impressive as it was only last year that two Chinese companies cracked the top 30 of ZenithOptimedia's list for the first time, with Baidu listing at No. 28.
ZenithOptimedia, a respected global marketing research agency, released its latest report on May 11, ranking Baidu as No. 14 among the "Top Thirty Global Media Owners 2015." The ranking measures "media revenue," which is all revenues derived from businesses that support advertising. The top of the list reads like a veritable who's who of American media companies: "Google is now 136% bigger than the second‐largest media owner (Disney), up from 115% a year earlier. It is also bigger than the second‐largest and third‐largest (Comcast) combined," ZenithOptimedia said in its press release.
2 online advertising companies are growing the fastest
What's more interesting, though, is which companies are growing the fastest and what this might mean for the future of the industry. Facebook (NASDAQ:FB) grew its media revenues 63% over the past year, according to ZenithOptimedia, and was the only company to grow said revenue more than Baidu's 43%. These growth rates propelled the two companies to the 10th and 14th spots on the list overall. These are two companies that derive nearly all of their revenue from online advertising on their respective platforms.
A company like Disney is able to tap into all four of the major media revenue streams -- advertising, subscription, pay-per-item, and merchandising. This diversification provides a powerful recurring business model, where IP leads to ad dollars from television shows, ticket sales from movies, memberships to online gaming sites, and royalties from toy makers. There's a reason it remains No. 2 on the list.
ZenithOptimedia says Google, Baidu, and Facebook, along with Yahoo! (No. 18) and Microsoft (No. 21), are the "five purely digital media owners in our global top 30." This model carries more risk than that of a company like Disney, which possesses many more non-digital media revenue streams. Furthermore, these five companies generated $71 billion in media revenue, representing 68% of all global digital ad spend, according to ZenithOptimedia's report, which says this was up from 67% in its previous report. "Power in the digital advertising market is concentrated in the hands of a few large platforms, and is becoming even more concentrated," it said in its press release.
Baidu outlook: Opportunities and obstacles
Whether this concentration is good for Baidu in the long run depends on one's view of what the company can become. If the goal is to become firmly entrenched as China's site of choice for advertisers, with small outposts in other countries, this digital oligopoly is probably a good thing for Baidu shareholders. If the goal is to eventually challenge Google globally, this concentration of power at the top will probably make the eventual battle a more difficult one to gain ground in.
It's also important to keep in mind that disruption comes quickly and harshly. Old-media companies were disrupted by Google, Facebook, Baidu, and others. It's a near-certainty that companies in the future will attempt to out-innovate the current market leaders. According to Jonathan Barnard, ZenithOptimedia's head of forecasting, "While some emerging‐market media owners face challenges in expanding their businesses in the short term, we expect to see more media owners from emerging markets enter the top 30 over the next few years."
Baidu is well-positioned to continue to make advances toward the top of the list. Robin Li co-founded the company in 2000 and still remains at the helm as chairman and CEO. His managerial and leadership skills have been lauded in the past few years by Forbes, BusinessWeek, and Time Magazine among others. Li has shown an ability to navigate the largest and fastest-growing domestic Internet market in a way that foreign firms have struggled to do. With a market cap still only about one-fifth that of Google's, Baidu may be toeing the line between market leader and future disruptor. It will be interesting to see where it falls on next year's list of largest media owners, but I bet Baidu will be higher than No. 14.