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by Susan Wright

In its bid to remain China's leading internet search engine, Baidu (NASDAQ:BIDU) is seeking to create a captive audience. As more competitors enter the market, China's Google has announced its intentions to fill the wish list of mobile browser users - faster Internet browsing and seamless cloud management are on the way.

Baidu had been steadily growing its search engine market share. Over 50 percent of the searches of China's half a billion internet users pass through Baidu's search engine. In mobile browsing, the company has 90 percent of the search traffic of the 388 million mobile users who use mobile browsing, about one third of the 900,000 mobile users.

With 60 percent of Chinese not yet online, not surprisingly, more competitors are entering the market to grab some of Baidu's growing market share. Only 40 percent of China's 1.3 billion citizens use the Internet while the percent in Western countries is closer to 80 percent. These Internet users spend about 10 percent of their time online using web search engines.

Baidu is consistently growing search engine traffic and online advertising market share. In the third quarter, revenues were up 49.7 percent to $994.6 million from the year-ago period. Net income rose 59.8 percent to 478.6 million, and earnings for the quarter were $1.39. Its growing foothold in the Chinese search engine market now competes with several new entrants.

Search engine market share in China is experiencing large swings from year-to-year, and 2012 has experienced some game changing swings. In 2011, formerly commanding most of the Chinese search engine market share, Google's (NASDAQ:GOOG) share fell to 16 percent, following its 2010 exit from the Chinese market. Baidu had 80 percent market share. In 2012, the changes to the competitive landscape have been dramatic. Newcomers Qihoo (NYSE:QIHU) and Sogou, owned by Sohu (NASDAQ:SOHU), have gained 10 percent and 2.9 percent of the search engine market, respectively. Baidu's share is now 55.46 percent. Google's presence has fallen to 7 percent.

Baidu is responding to the competition with new mobile and cloud products as part of its Box computing strategy. The company showed its market-savvy when in September it introduced the Baidu Explorer, the fastest Android browser on the market. Baidu is the default search engine on about 80 percent of Android phones. Fast browsers are the most sought after apps among mobile phone users. A huge opportunity is ahead when Apple (NASDAQ:AAPL) integrates Baidu's search engine into the new Apple iOS 6 operating system. If Baidu's intention is to 'box' in mobile users with its Box computing strategy it is working.

In addition to attracting more search traffic, Baidu's fast mobile browser will encourage browsers to do more shopping online. With the majority of China's search engine traffic, Baidu is capturing the growth in online advertising revenue. In the third quarter, online marketing revenues were up 49.6 percent to $993.8 million. The number of active online marketing customers on Baidu jumped 28.3 percent to 390,000 while revenue per online marketer increased 16.8 percent to $2,546.

Most of Baidu's advertising revenues are linked to online shopping, a booming market in China. In the third quarter of 2012, the Chinese made over $150 billion in online transactions, up 73 percent from the year-earlier period, reports EnfoDesk. Baidu will continue to benefit from growth from low end and high end shoppers. China's rising middle class is bringing steady streams of shoppers online. More of the Chinese shoppers who are powering sales in luxury goods will follow luxury brands online. While only 3 percent of Chinese luxury good sales take place online, more luxury brands are wooing Chinese consumers online. Direct online sales by luxury brands are addressing consumer fears over buying fakes.

Baidu also has some savvy new competitors. Following Google's withdrawal from China, Qihoo 360 Technology, maker of China's most popular web browser, replaced Google with its own search engine in August. Qihoo has just under 300 million mobile browser users, which is comparable to Baidu's mobile search engine market share if all users use the Qihoo search engine. Qihoo also provides Internet and mobile security technology.

With under 3 percent of search engine traffic, Sogou enjoyed positive momentum in the third quarter. On an increase in traffic and costs per click, Sogou saw revenues double from the year-earlier. Traffic was up 25 percent and the paid click rate 50 percent The company focused on adding more intelligence to its Sogou pinyin search engine, including new functions such as sting analysis. From the prior quarter, search query traffic grew from 28 to 74.4 percent. Sohu derives most of its revenues from online gaming and video services.

Baidu is expanding its Box computing strategy once again to keep Internet users captivated. Adding to its cloud platform, it is making a $1.6 billion investment in cloud infrastructure. Baidu's Wangpan, meaning web drive, is similar to Google Drive and will offer 100 gigabytes of storage. In the Cloud space, it competes with Google Drive, Microsoft's (NASDAQ:MSFT) Skydrive, Alibaba, and Dropbox. More Chinese connect online through their mobile phones than fixed internet connections, a trend likely to continue with the growing popularity of tablets.

If Baidu aspires to remain the Google of China, however, its tech-savvy may be more important than its market-savvy. Google retained its position as number one search engine by providing the best search engine technology, and improving search features for users. A better Google cloud strategy for mobile computing, Google Drive, only recently arrived. Robin Li's expertise in HTML analysis and optimizing search technology for the intricacies of the Chinese language provide a comparable advantage, as long as he uses it and keeps advancing the core search engine functionality.

Baidu is turning its focus to international markets, including Japan, Southeast Asia and Brazil. Revenue per advertiser should be higher in international markets but the cost of customer acquisition will also rise. Google is estimated to make about $4000 in revenue per advertiser versus Baidu's $2546. The cost of traffic acquisition will also rise. Baidu's traffic acquisition costs have been steadily climbing but remain under 10 percent of total advertising revenue versus 25 percent for Google. Total 2011 advertising revenues for the US search engine were $36.5 billion, including network members.

Baidu has a price-to-earnings ratio (P/E) of 23.47 versus 14.42 for Sohu, and 20.44 for Google. Qihoo, whose core business has been internet virus software, saw a lift in its stock price in response to its rapid search engine market share grab. Its P/E is 60.44 well above other virus companies and its EPS .38. Baidu's EPS is 4.42 and Sohu's 2.63, while the more mature search giant Google has an earnings per share of 31.91. I think Baidu's latest strategic move to 'box' in search engine traffic will act as a positive catalyst for share price growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.