Bottom line: Resolution of Baidu‘s dispute with a one of its top clients, combined with declining profits, reflects a new reality that is seeing its pricing power erode as it faces growing competition from both search and non-search service providers.
A new report is confirming that leading search engine Baidu (Nasdaq: BIDU) has quietly settled a dispute with one of its major advertisers, which shaved nearly 15 percent off the company’s stock at the time. But the dispute is clearly have some lasting damage on Baidu’s share price, reflecting the reality that new challenges from rival search engines and also from non-search services like Tencent’s (HKEx: 700) WeChat may be undercutting Baidu’s ability to command huge premiums for its advertising services.
Baidu’s misery in China’s stock Markets
Adding to Baidu’s misery is the recent plummet in China’s stock markets, which has fueled a concurrent drop in overseas-listed Chinese tech stocks like Baidu. That sell-off saw Baidu’s shares dip more than 5 percent in the last 3 trading days of last week. That fall shaved off nearly $4 billion from its market value, as its shares reapproached levels last seen during the stand-off with the Putian Healthcare Industry Chamber of Commerce that broke out in late March.
Baidu’s days of heady growth were already in the past when the Putian spat broke out, mostly due to its huge size that made maintaining strong double-digit growth difficult. But that conflict underscored the new reality that Baidu was losing the stranglehold it held on China’s search market for years, which allowed it to charge huge premiums for its advertising services.
I have to commend the Chinese reporter who got an update on the Putian story from a chance encounter with a senior official closely tied to China’s largest association of privately run hospitals. Media were reporting quite regularly at the height of the spat back in March and April. But then the news fell out of the headlines before the matter was resolved, which is quite typical of the short attention span of the media in general. The last reports had Putian suspending its boycott in early April as a goodwill gesture, but no actual resolution of the matter was ever announced.
All that said, this latest update isn’t exactly a masterpiece in terms of actual reporting or writing. It doesn’t even mention Baidu by name, but does cite the Putian-connected Chen Deliang saying the matter has been resolved and Putian’s members are once again advertising on Baidu. (Chinese article) The reporter got the news at an unrelated event where he ran into and recognized Chen, who has no official role at Putian but is considered the organization’s “godfather”.
Getting on with Business
Reasons behind the original spat were never completely clear. Baidu had implied that Putian hospitals were making false claims in some of their ads, while Putian implied that price was the bigger issue. (previous post) Chen’s comments don’t really make clear who ultimately yielded in the conflict, and he simply said that Putian’s members needed to keep advertising to maintain their business. I suspect that both sides ultimately gave ground, with the hospitals perhaps scaling back some of their inflated claims while Baidu offered some price concessions.
The fact of the matter is that Baidu has been rapidly losing its dominance of China’s search market over the last 2 years, especially to the newer Haosou search service operated by Qihoo 360 (NYSE: QIHU). Baidu’s former control of more than 70 percent of the market had been reduced to about 55 percent by the end of last year, while Haosou and Sohu’s (Nasdaq: SOHU) Sogou controlled 30 percent and 13 percent, respectively.
Baidu certainly won’t lose its status as one of China’s “Big 3 Internet” companies anytime, soon, and it showed its continued attraction to investors just last week when it announced it had priced its planned sale of $1.25 billion in new bonds. (previous post) But the fact that Putian felt bold enough to boycott Baidu earlier this year shows that the company is no longer the monolith it once was.
New challenges facing Baidu were evident in its latest quarterly results, which saw its revenue rise a respectable 34 percent even as its profit posted a rare decline. That disparity reflects Baidu’s new reality, which is likely to see advertisers like Putian gain increasing leverage over the company as they get newer choices not only from Qihoo, but also from operators of non-search services WeChat and the Twitter-like Weibo (Nasdaq: WB).