Baidu Is Trying Way Too Hard To Please Wall Street

Dec. 6.06 | About: Baidu, Inc. (BIDU)

Baidu (NASDAQ:BIDU) recently announced that it was going to take its cash pile from its IPO on the NASDAQ last year and make a foray into the search market in Japan because of “similarities between the Chinese and Japanese languages”. In an interview with the Wall Street Journal, the CEO and Chairman of Baidu, Robin Li, said that the search market in Japan is “primarily dominated by two players we are very familiar with. We think we can do better." In the China market, Baidu has been able to leverage its knowledge of local consumers and conditions to beat up Yahoo (NASDAQ:YHOO) and Google (NASDAQ:GOOG).

Wall Street certainly seems to like the announcement, with Baidu’s stock rising another 6.82% to $122.72 USD yesterday.

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BIDU 1-yr chart
BIDU 1 yr chart

But this is one of the problems I find with Baidu – I feel that they are doing things for Wall Street rather than for the long-term health of their business. Moreover, Softbank (OTCPK:SFTBF) essentially runs Yahoo in Japan and Alibaba in China. So Baidu is not really competing against the same players and there are so many different variables in Japan than in China.

Robin’s quote reminds me of MNCs coming into China thinking that they know how business is run in America and Brazil and thus know how it is done in China. Japan is a fundamentally different market than China.

As China’s companies like Baidu and Lenovo begin to expand overseas, are they going to fall victim to the same lack of understanding of local conditions which, ironically, they have touted as their strength over MNCs in China?

Baidu Baidu’s core competency is the China market. The internet search market is still developing in China, so Baidu should focus on figuring out how to leverage their dominance in the sector and similar ones like mobile phone search to generate more revenue. Despite the fact that they control search for China’s 125 million internet users, the final competition for who controls the revenue from search is still up in the air. Google very well could bounce back and dominate the market or Microsoft (NASDAQ:MSFT) could come on strong and leverage the growing popularity of MSN Spaces. No one controls the ad market for China’s 450 million phone users. Baidu would be the natural front runner to figure out how to capture this sector or develop cool services as Google has done.

My firm, the China Market Research Group [CMR], conducted interviews in Shanghai with Chinese youth [an age group I have termed as China’s Baby Boomers]. 80% said that they use Baidu for Chinese language searches. Google came in second with about 15% of responses. Although I hold Jack Ma in high esteem, his Yahoo China did not rank highly in the responses. Google did capture about 75% of the responses when China’s Baby Boomers conducted English searches, but they only did so 15% of the time or so and those were mostly work related.

Many people have asked me for an opinion of Baidu since last year. I have had to think long and hard about Baidu. While they are not as focused as companies I have written about, like New Oriental (NYSE:EDU), Ctrip (NASDAQ:CTRP), or Netease (NASDAQ:NTES), Baidu’s management team does have a sustainable business model, at least until Google and Yahoo get their acts together.

I think the problem is that Wall Street has overvalued the short-term potential in Baidu by drawing comparisons to Google in America, which is why Baidu’s leadership is trying to come up with new ways to generate revenue by entering Japan and other Asian markets to prevent a stock drop. Baidu will not be able to hit the same growth numbers as Google.

The pirated music and click fraud issues are serious for Baidu as others have written about. In our surveys, 20% of all Baidu searches were MP3 related which could take a sizeable chunk if the music industries future lawsuits against Baidu by companies like Warner Music (NYSE:WMG), Sony-BMG, EMI, and Universal Music Group (UMG) are successful. The media group lost a recent one court case against against Baidu but is sure to appeal.

Moreover, while the Chinese spend more time online per capita than Americans [18 hours a week vs. 12 hours or so], Chinese users are heavily slanted towards 14-28 year olds who do not own small businesses. Older, SME owners that would be a plum market for paid search advertising in the US and sustain Google and Yahoo there just do not have the internet savvy in China.

They buy ads for Baidu through face-to-face sellers rather than online which will necessarily prevent huge growth because of the difficulties in scaling and managing such large sales teams. Unlike Ctrip which relies on couriers that need very little skills, Baidu’s relies on salespeople/ distributor’s salespeople when retaining and recruiting good salespeople is very difficult. Such human resource problems will naturally limit Baidu’s current business model. But moving into Japan is not the answer as the leadership will have to focus time and resources that would be better spent in the increasingly lucrative China ad search market.

While Baidu currently dominates the search market in China, there is no guarantee that they will be able to maintain this position if they do not innovate new services and streamline business processes.

For investors, I think that Baidu will maintain its share price and bounce up slightly in the short-term, like another darling of Wall Street analysts which I have written about, Focus Media (NASDAQ:FMCN).

But long-term, I think that Baidu, like Focus Media, will have major difficulty living up to the expectations of Wall Street analysts. Moving into Japan is not the answer.

Disclosure: Author has no position in BIDU