Baidu Gains Traction In China's Smart Phone Market

| About: Baidu, Inc. (BIDU)

Chinese Internet search giant Baidu (NASDAQ:BIDU) has seen its share price drop by around $30 since mid-April. However, with some big announcements recently, Baidu has already seen an increase of around $6. Interestingly enough, this increase has come on the back of work already done by Google (NASDAQ:GOOG).

The big news is Baidu's new low cost smart phone. Baidu plans to keep the cost of its smart phone very low by using its cloud platform. Since Google's search engine is very poor in China due to high censorship that causes poor load times, Baidu will be able to capitalize on the fact that Android uses Google's search.

Instead of using a slow, unreliable search engine, Baidu is banking on consumers desire to use Baidu, thus switching to its smart phone. Since Android places the Google search engine front and center, a Baidu phone that replaces Google's engine with its own could convert an extremely large portion of customers, especially due to the large smart phone market in China.

The irony of the situation is that Baidu in essence replicated Google's search engine, and its new cloud operating system is in essence a variation of the Android operating system. Thus, by mainly not being Google, it can bank on securing a large portion of the smart phone market. Since this market in China is similar to the one here in the United States, securing fast and strong search capabilities early will be the key to securing huge profits in the future.

Recent reports stating that corporations are increasing the amount of money they are spending on online advertising drives this home. Online advertising was already incredibly profitable, and with more money to be had, it's better for Baidu to get into the smart phone market sooner than later.

By offering a low price alternative to other smart phones, it can expect to see very fast growth. Additionally, using a cloud platform allows it to integrate all its other cloud solutions into the phone easily, making a Baidu smart phone purchaser an expected long time Baidu user. For this reason, it is not surprising that the market rewarded Baidu on the announcement of the phone. I see no reason it won't continue to do so in the coming days.

Additionally, since those using smart phones are connected to the Internet at all times, Internet use has increased dramatically. In fact, Internet use is expected to continue to increase at an impressive rate in the next year, and I imagine for quite a long time in the future. Thus, there will be more time for search giant Baidu to serve up ads to its customers.

Not surprisingly, I would expect Baidu to take a similar approach to its smart phone as Google does with Android by serving up location based advertising to its customers. In addition to securing more, higher margin ad dollars, this would be huge for Baidu as it can more effectively connect businesses with customers, one of the key factors to its success.

However, if Baidu wants to gain market share outside of China, it will face an uphill battle.

First of all, much of the reason it is so effective in China is that Google services are slow or nonexistent in China. Due to its decision not to censor itself, China decided it would censor the search results, resulting in very poor services. Needless to say, with poor services, it had little chance of success in China, allowing Baidu to take over.

In other countries, don't expect Baidu to be so lucky. Google has a near stranglehold on search engine capability in most countries and has consequently soaked up most of the ad revenues related to this dominance. Having a very low cost smart phone will certainly help it out, but playing catch up will be hard.

With Android proliferation, many low cost Android phones are already on the market. Baidu will need to give users an exceptional benefit to cause them to switch over.

No talk of Baidu can be complete without talk of its competitors. Although not competing in China, Google will be its main competition in expanding outside of China. First, upping it search engine, Google is making its search smart. The idea is that instead of merely presenting words that match what one searches, Google will determine exactly what the user means. Thus, typing a search will yield different results for a person who lives in Detroit, as opposed to anywhere else. Additionally, a report stated that Google is dominant in its advertising reach, profitability and format. This tells us what we likely already know.

Competitor Sina (NASDAQ:SINA) has had a good couple of weeks. Just this week Motorola unveiled a phone that came with a Sina music app embedded in the phone. For many reasons, this is similar to the phone being about to be offered by Baidu because it focuses on a specific type of customer. For this phone, it is the consumer who values premium music. For Baidu, it's those who value its product over Google's. Additionally, Sina's advertising displays are far ahead of its competition. In a mobile environment, having good advertising is of increasing importance. If Sina is partnering with the competition, Baidu will have to step up its advertising.

Of course, the international smart phone stage is only going to get more crowded with Baidu's entrance. Korea's Samsung line of phones have sold well in Asia, and will continue to sell well for phone carriers in the U.S. like AT&T (NYSE:T). Of course, Intel (NASDAQ:INTC) has tried to stick its neck into the business too, by releasing a smart phone for the expanding Indian market last month. Baidu will have to compete with these companies on stages outside China for truly impressive growth in its stock price.

Overall, Baidu is in a good position for strong future growth. Although it will be very difficult to take on Google outside of China, it has a good chance of taking a huge portion of the smart phone market within China. Make no mistake, there are a lot of consumers in China, and a successful smart phone platform will yield huge returns. If you are considering investing in Baidu, now might be a great time to do so. I think this stock could easily double in 18 to 24 months if it gains significant traction in China's smart phone market.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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