Bottom line: Baidu’s crackdown on internal corruption and big jump in a ranking of global media firms are both good publicity, but won’t change the fact that it’s facing sharply slowing growth over the next year.
Following a bruising battle with some of its leading advertisers in March, leading search engine Baidu (Nasdaq: BIDU) is in the headlines this week on a more positive note with a report it is cracking down on internal corruption. At the same time Baidu is in a separate similarly positive headline that shows it is quickly climbing the ladder on a list of global media companies, surpassing much older rivals like Yahoo (Nasdaq: YHOO) and Microsoft (Nasdaq: MSFT).
The first of these headlines casts a spotlight on the many corrupt practices that frequently occur in China’s young business culture, such as preferential treatment for customers who pay “special” fees and bribe individual employees. Such practices were almost certainly a factor behind the high-profile spat that saw one of China’s largest associations of hospital owners boycott Baidu’s advertising services in March, dealing a significant blow to Baidu. (previous post)
The latest reports cite unnamed sources saying Baidu is now conducting its own internal investigation of 3 director-level employees on suspicion of engaging in corruption. (Chinese article) The trio of managers all come from Baidu’s channel divisions, though there’s not much additional detail besides to say that the probes are still in progress. The fact that reports appear in a number of media and place emphasis on Baidu’s internal processes to fight corruption indicate this news is almost certainly being leaked by Baidu to show the world that it’s serious about running a clean business.
This particular probe comes just a half year after another internal probe that saw Baidu hand over cases involving 5 employees suspected of corruption to law enforcement authorities. In that instance 2 of the employees were accused of taking money from websites that wanted to boost their search rankings by falsifying their traffic volume, while 2 others were accused of taking bribes, and the fifth was accused of embezzlement. (previous post) Leading telecoms equipment maker Huawei also launched a similar internal crackdown last year. (previous post)
This kind of internal corruption is present at all Chinese Internet companies, large and small. It’s quite common in China for employees to use their position to earn some extra money for themselves, a fact that also lies at the heart of Beijing’s ongoing national anti-corruption campaign at government agencies and big state-run firms. Baidu is leaking details about its campaign to show it’s serious about the issue, but I hope and expect that all the major Internet companies are taking similar measures.
In the other Baidu-related headline, the company was one of the fastest risers in the latest annual list of the world’s top 30 global media owners compiled by consulting firm ZenithOptimedia. (English article) Baidu climbed to number 14 on this year’s list, a big jump from its position at 28 a year ago. That helped it to pass Yahoo and Microsoft, which came in at 18th and 21st.
Of course the big question from here will be whether Baidu can continue its meteoric rise, or if it’s destined to slow as it faces new competition and also more defections from big customers like the one in the hospital association spat. I suspect the answer is that its growth is already entering a new, slower phase and may never accelerate again to levels of the last 10 years.
In its last quarterly report released late last month, the company posted its slowest revenue growth in 7 years, as well as a rare decline in net profit. The company is not only facing new competition from the upstart Qihoo (NYSE: QIHU), but is also spending big money to develop its mobile search business. All of that, combined with China’s broader slowing economy, means investors probably shouldn’t hold out too high expectations for Baidu’s business growth or its shares over the next year.