Baidu's (BIDU) leadership position in PC search is a story of the past, as the company has shifted its focus to the mobile platform. Baidu is attempting to strengthen its position in mobile, as mobile internet continues to increase with 3G penetration. Baidu has adopted a three way strategy to monetize mobile, which includes core mobile search, Maps/ Location based services, or LBS, and app distribution.
In search, Baidu is facing intense competition, as Qihoo 360 Technology (QIHU) is closing in terms of market share, and Tencent bought 36.5% stake in Sohu's (SOHU) search engine Sogou for $448 million in September. This merger increased Tencent's search traffic share to around 14%, combining Sogou's 12.01% and Tencent's 1.48% from Soso. The main challenge for mobile search is that many websites don't have mobile-friendly websites. Baidu is trying to convert these PC centric websites into efficient mobile websites to attract users towards mobile search. In terms of maps, Baidu has more than 54% share in the mobile maps market in China, with more than 246 million total subscribers. Baidu will leverage its vast user base to offer LBS, expanding into a wide number of transactions, including hotel bookings, movie tickets, and taxi bookings.
Baidu has taken several initiatives to expand its mobile map share including its partnership with Dianping, a location based and group buying website, and acquisition of another group buying website, Nuomi, to strengthen LBS and maps with Nuomi's strong LBS capability. The last pillar for its mobile monetization is its app distribution, and Baidu's light app has seen encouraging results with developers and customers. The light app increases the visibility of less popular apps, and its indexation feature through search engine boosts the light app's promotion and monetization capabilities.
Baidu's mobile search continue to gain traction with an installation base of 330 million at the end of the third quarter this year, a 50% increase quarter over quarter. I expect increasing mobile traffic would drive Baidu's search customers to allocate more of their ad budget to mobile instead of PC. In the second quarter, mobile contributed more than 10% of Baidu's total revenue, while in the third quarter Baidu hasn't disclosed its mobile revenue contribution since there wasn't a significant change. However, I believe that with the ongoing efforts, Baidu has created a mobile ecosystem through its light app, LBS services, and cloud computing solutions, which will ramp up mobile monetization for the company.
Head on head competition in Cloud storage
Baidu and Western Digital (WDC) have collaborated to provide hybrid digital storage solutions to Chinese consumers. Baidu Yun, a public storage services company, will integrate with WD's cloud and personal storage solutions. WD's 'My cloud' personal drives are available in 2 TB, 3 TB, and 4TB capacity and will allow users to store and secure their content from computer and mobile devices. In addition, WD My Cloud™ EX4 for professionals and workgroups will have up to 16 TB. This partnership will allow users to transfer documents and files between WD's My Cloud and Baidu's Yun. Baidu is the leading provider of cloud storage with more than 100 million users, but competition in the Chinese cloud storage market is getting intense
There are many large players like Tencent (OTCPK:TCEHY), Qihoo, Shanda (GAME) and startups such as Kanbox, YUNIO, and Qbox in the Chinese cloud storage services market. Baidu started cloud storage in 2012, offering 15 GB of free storage for every registered user. With the growing competition, Baidu started offering 2 TB of free storage capacity to its users beginning in September. Tencent took global cloud storage solution to a new level when it offered 10 TB of free space in August 2013, more than what Dropbox, Microsoft's (MSFT) Skydrive, and Google's (GOOG) Drive could offer. Now it intends to offer similar services to international users by early 2014. This should ring warning bells for global giants Microsoft and Google, as Tencent is offering 50 times more space than Skydrive's maximum limit of 200 GB for $100 per year.
This will definitely mark the emergence of Chinese companies on the international platform, and I think Baidu is well positioned to compete with other players through its partnership with WD. The Chinese cloud computing market has witnessed huge growth of 91.5% during the period 2010-2013, and is expected to reach $164.2 billion by 2015. Looking at this tremendous opportunity, Baidu has invested in cloud computing in the last few years. It has encouraged developers to build apps using its cloud computing services. Through its cloud platform, users can then download third-party apps, acting as an entry point for more users to connect with Baidu services. Therefore, I believe Baidu's cloud platform will help drive more traffic towards its services.
Baidu has increased its focus on the mobile platform and has made significant progress, which yielded strong revenue in the third quarter. The company has invested in mobile, as evident in the company's SG&A expense, which grew 115.4% in the third quarter. This has increased pressure on the cost structure, which was evident from its earnings growth of 1.3%, much less than the revenue growth of 42.3% in the third quarter of 2013.
Despite the fact that margin pressure will continue in the short term, I believe Baidu is on the right track with its mobile monetization, and its investment in the mobile platform will pay off. The competition in the Chinese mobile search market is starting to heat up as competitors become aggressive to achieve meaningful market share, but Baidu is uniquely placed among its competitors.