Baidu.com to Provide Sales Support to MSN China – Is Web 2.0 Next?

WR Hambrecht analysts James Lee and Xiaofan Zhang recently commented on recent reports Baidu.com (BIDU) will provide MSN China (MSFT) with sales support. Their note follows:

News –

· Baidu helps MSN with sales support. MSN China announced that Baidu will provide sales and distribution support for MSN China and its affiliated websites, including China Telecom.

· MSN will still run the search function. MSN China still provides the user interface for the search function. The company is committed to continue developing its own search capabilities. Baidu will provide paid search listing for MSN China, leveraging the Chinese search engine’s in-house sales and 200+ resale agents.

Our take –

· Modestly positive for Baidu. We believe this deal will bring incremental revenues to Baidu. However, MSN’s market share in search is very small (not ranked by CNNIC). Therefore, we believe revenues to Baidu may not be material. As of today, MSN has not monetized its search engine.

· Strategic importance of sales networks. This agreement highlights the strategic importance of sales and distribution for paid search. After MSN China paid $21M USD to become the search engine for China Telecom, the company needs to ramp up the operations quickly without having the luxury to build the infrastructure for sales support. By working with Baidu, MSN China can achieve that goal in a timely manner. This is also an acknowledgment by MSN that localizing the sales effort in China is difficult to execute.

· Web 2.0 next for Baidu? The Chinese press reported that Baidu could be buying file-sharing website Xunlei (translated Web Thunder in English). We heard from our checks that Google was interested as well. While it is difficult to predict, we believe that either Baidu or Google will make a strategic investment in the user-generated site, which is very popular for file search and fast-download technology (very useful for video content). We believe Baidu plays into the sweet spot of web 2.0, as the company has 60% of its users at age 23 or younger. Among the students, Baidu is the favorite search site by far at 48%. Baidu has created a powerful music search platform, and we believe that other content search such as video is a natural extension.

· Reiterate buy with Price Target of $130. While the timing of the deal is a bit surprising to us given the recent management turnover at MSN China, we believe this is another data point that Baidu will likely maintain if not extend its market leading position.

Search result of keyword “Cell Phone” on MSN China