INTERNET: Baidu Embraces Amazon, Jettisons Music

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Bottom line: Baidu’s disposal of its problematic music division looks like a smart move that was long overdue, while its new tie-up with Amazon looks minor but could get much bigger if it expands into the e-commerce sector.

Baidu in Christmas time tie-ups with Amazon, music company

Leading search engine Baidu (Nasdaq: BIDU) is in the headlines with a couple of big strategic moves, led by an intriguing new tie-up with Amazon (Nasdaq: AMZN) that could have broader implications in the e-commerce space. The other news has Baidu merging its problematic music division, which was historically plagued by piracy issues, into a new company headed by an entertainment firm called Taihe Music Culture Development.

Both moves represent incremental strategic tweaks for Baidu, as it tries to expand beyond its core online search business into other areas of the Internet. The Amazon alliance looks relatively superficial, but could hint at a broader future tie-up that might see the companies work together in China’s lucrative but highly competitive e-commerce space dominated by Alibaba (NYSE: BABA) and JD.com (Nasdaq: JD).

The music merger comes 2 months after media reported that Baidu was looking to sell its music unit, and appears to represent the dumping of an asset that was quite useful to Baidu early in its history but later became a liability. That deal has Baidu saying it will merge its music business with Taihe to form a new company. (English article; Chinese article) There’s no word on shareholding structure, but I suspect the new company will be controlled by Taihe and Baidu could ultimately sell out its minority stake.

Word that Baidu wanted to sell the music division first emerged in September, in a move that I said looked long overdue. (previous post) The original music service was a peer-to-peer (P2P) platform that proved hugely popular with web surfers but also drew lawsuits due to the rampant trade in pirated music that it fostered.

Baidu tried to downplay that part of the business by more recently signing licensing deals with some major record labels to sell legal copies of songs. But I suspect that part of the business never gained much traction, and the lingering piracy issues on the P2P platform led Baidu  to decide it was better off without the unit. This new deal is being called a merger, but it’s probably more accurate to call it a sale that will relieve Baidu of this problematic asset once and for all.

E-commerce Potential With Amazon

Next there’s the Amazon deal, which looks quite minor on the surface. The tie-up will see Baidu become the default search engine on Amazon’s products in China, including its ultra low-cost Fire tablet that will soon go on sale in the market. (English article; Chinese article) As part of the tie-up, Baidu and Amazon will also integrate their China app stores, and Amazon will also integrate in China with Baidu’s iQiyi online video service.

None of these moves seems particularly ground-breaking and normally wouldn’t be worth a big write-up. But more intriguing is the possibility that the pair might be eyeing a much bigger alliance if they work well together. Amazon and Baidu have spent hundreds of millions of dollars on e-commerce in China over the last decade, but neither has made much progress despite that effort. Baidu made its latest effort in the space just last month, when it launched an upscale online marketplace called Baidu Mall. (previous post)

Despite the lack of progress, the fact remains that Amazon is the global leader in e-commerce, and thus has lots of experience and expertise in the area. And Baidu is still China’s dominant search engine. That could become a potent combination if the 2 companies decide to expand their alliance to e-commerce to challenge Alibaba and JD. In this case both Baidu and Amazon are quite practical and adaptable, and I would put the chances at better than 50-50 that they could expand their alliance into the China e-commerce market sometime next year.

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