In my May 12th note titled Baidu's Entry-Level Device Hits The Sweet Spot, But Challenges Remain I pointed out that Baidu's (BIDU) 1000-yuan smartphone allows the company to:
- Penetrate China's fast growing entry-level smartphone market
- Establish brand recognition and pave the way for a future push into the high-end segment
- Solidify industry leadership in mobile search.
However, Baidu's entry-level smartphone is unlikely to have a meaningful contribution to Baidu's mobile ambition unless the company:
- Educates consumers in the advantages of Baidu Yi compared to the other Android forks
- Develops a robust app library and large developer base
- Attracts talented senior and mid-level managers who have relevant expertise and experience in the mobile OS space.
In my view, Baidu will likely face cost pressure if the company is serious about gaining a significant share in China's crowded mobile OS market through mass marketing, R&D and key personnel hiring.
Lack Of Significant Differentiation To Result In High Customer Acquisition Cost
As I mentioned in my December 4th note titled Baidu Yi Heats Up China's Mobile OS Market, Baidu Yi is a Google (GOOG) Android fork in that most of the core Android applications, such as search, map and messenger, are replaced by their respective Baidu apps.
Baidu is not the first company to create an Android fork and mass market it to the consumers. Based on my estimate, there are already over 300 smartphone models priced from Rmb 500 - Rmb 2,000 from over 20 handset manufacturers in China that run on Android or Android forks.
Aside from Baidu's search function and Baidu Cloud, the Yi lacks significant differentiation from its Android cousins, hence winning over existing Android users who have other brand handset will be challenging for Baidu. As a result sales and marketing cost will likely climb as Baidu invests in traditional media, such as TV and magazines, and online media, such as video sites and internet portals.
While media advertising could initially grab consumers' attention, early adoption could be limited due to Baidu's lack of brand equity in the mobile handset space. Therefore, Baidu needs create a large national sales force of ~200 - 600 people to showcase and educate consumers on Baidu's advantage over its rival handsets. A sales force of 400 people each earning Rmb 3,000 per month will result in approximately Rmb 14.4 million incremental annual expense, or ~4% of Baidu's 1Q12 SG&A expense. I note that such a sales force is paid just on salary since their objective is to promote consumer awareness of Baidu Yi rather than to make sales.
Aside from building a knowledgeable sales force, promotional events in high population density areas, such as Wangfujing Shopping Street in Beijing and People's Square in Shanghai, are also a necessary component of brand building. Events featuring live demonstrations and product comparisons can likely stimulate consumer interests that translate to future sale. In addition, since entry-level smartphone users are Baidu's target market, sponsored events with phone giveaways at university campuses allows the company to capture the younger consumers and build an emerging user base for the product.
Finally, celebrity endorsement is a must in China's marketing culture because celebrities and public figure have significant influence on Chinese consumers' purchasing decisions. An endorsement from a well-known celebrity allows Baidu Yi to gain credibility in China's crowded mobile handset market.
A Phone Without Apps Will Eventually Turn Into A Dinosaur… Just Look At Blackberry
Despite its early stage of the development, Baidu has been delivering strong execution in building its app library, which currently features over 70,000 apps. However, the number of apps pales in comparison to Apple, whose iTunes Store features over 500K apps, and Android Store, which features six times the number of apps on the Baidu App Store.
Baidu needs to continue expand the number of relevant apps that attract the Chinese users to gain a meaningful foothold in the market or else Baidu Yi will share similar fate to that of RIM's (RIMM) Blackberry and become increasingly marginalized by the consumers due to lack of relevant applications.
Management's Lack Of Experience With Mobile OS Calls For Key Hiring, But Such Talent Is Rare
Baidu's entrance into the mobile OS space is not an innovation, but an imitation of Google's mobile strategy. As a late-comer, Baidu faces an uphill battle because the company's management lacks previous experience and expertise on key strategic decisions involving product development and marketing. While Baidu's marketing VP Guang Zhu and sales VP Zhan Wang are talented managers who have made significant contribution to Baidu's growth, their experiences in the mobile OS and marketing space are pale compared with Nikesh Arora, Chief Business Officer of Google.
China's current mobile OS landscape is highly saturated by Android and its forks, which is different from the time when Android entered the US market to face a handful of major players, namely iOS, Blackberry, Windows, and Symbian. Hiring talented senior and mid-level managers that can bring unique insight and marketing strategies to differentiate the Yi from the competing Android forks will be challenging and costly because such talent is rare in China.