Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Is Baidu Able To Further Grow Its Marketing Customer Base?

|Includes:Baidu, Inc. (BIDU)

Baidu reported 446,000 online marketing customers in 1Q14, a 1.1% decrease vs. number for 4Q13. Baidu's CEO Robin explained the decrease is because the company is trying to verify the trustworthiness of customers. He expected the number of customers will resume growth in 2Q14. Is that true? Was the verification program really the root cause for slowdown, or was it just used to cover the fact that the market is already saturated now? We can verify Robin's comment by examining data from a variety of sources.

If we want to assess the upside bound of marketing customers base, then the number of registered businesses in China could be taken as a good reference; it is the ultimate upside bound to the customer base. According to China's statistics bureau, by July 2013, there are over 57MM registered enterprises/partnerships/proprietorships in China. The agency further divide the registrants into four classes, i.e. large/mid/small/micro (see Table 1). If Baidu plans to target those large/mid/small enterprises (if we believe 'micro' enterprises have almost no budget for online marketing), the number of its potential customer base is roughly 18.9MM. This is significantly higher than the current size of Baidu's marketing customers. Assuming a penetration rate of 20%, we can forecast that Baidu's number of customers could reach 3.8MM, 8.5 times its current size. This number could be interpreted as a long-term estimate of Baidu's potential customer base. Assuming Baidu's ARPC will remain at its current level (growth in ARPC from larger corporates will be offset by lower ARPC from SMEs & local merchants), we could estimate Baidu's annual marketing revenues could ultimately reach RMB 300 billion.

Table 1: Number of registered enterprises/partnerships/proprietorships in China (07/2013)

Size

Number
(in thousands)

%

Large

171

0.30%

Mid

1,368

2.40%

Small

17,311

30.37%

Micro

38,150

66.93%

Total

57,000

100.00%

Total (excluding micro)

18,850

33.07%

     

Source: China's National Statistics Bureau

   
Click to enlarge

To conduct further checks, we could also refer to data reported by other e-commerce participants. Online marketing customers could be roughly divided into two broad categories, i.e. B2B & B2C customers. Alibaba is another great Internet company in China, and it had a great B2B business platform, 1688.com (sort of like eBay, but only for B2B, such as wholesalers). According to Alibaba, its B2B platform had over 650,000 paid customers by 2011 (See Table 2). The group explained the decrease between 2010-2011 as the result of better control over customer's credibility. According to iResearch's estimate, Alibaba takes up over 43% share of China's online B2B business in 3Q13; assuming no significant overlapping between the customer bases of Alibaba's and its competitors' (as many SMEs have too limited budget to promote in different platforms), we could roughly estimate that there are over 1.6MM online B2B merchants in China.

Table 2: Number of Alibaba's paid customers* ^ (China only), 2007-2011

 

2007

2008

2009

2010

2011

Number (in thousands)

266.01

372.87

501.32

677.65

658.80

           

*Alibaba's share of China's B2B market is 43% in 3Q13, according to iResearch.

       

^Data is not available for 2012 onwards due to Alibaba's privatization.

       

Source: Alibaba

         
Click to enlarge

58.com is a craigslist-like online classifieds website, which people to explore & spend at the local merchants around them (i.e. an online B2C advertising platform). The website reported it had about 400,000 online paid merchants by 2013 (see Table 3). By examining the trend, it is quite evident that the website will still be able to rapidly expand its online marketing customer base going forward.

Table 3: Number of 58.com's paid customers* (China only), 2011-2013

   
 

2011

2012

2013

Number (in thousands)

120.40

227.90

392.90

       

Source: 58.com

     
Click to enlarge

Combining the number of B2B & B2C customers estimated from the above cases, we could roughly estimate that there are at least over 2MM merchants which already promote & conduct business online, 5 times Baidu's existing customer base. These merchants could be Baidu's ideal potential marketing customers, as they are already used to e-commerce & online advertising. For these merchants, I believe Baidu's advertising platform is not mutually exclusive against that of Alibaba & 58.com, as they are different in nature. The number could be interpreted as a near-term estimate of Baidu's potential marketing customers base, as the number itself will probably continue to grow rapidly in the future.

By and large, from the analysis above, I believe we can comfortably accept the statement by Robin that Baidu's customer base will continue to expand in the future, at least for the time being. Going forward, we need to watch out for Baidu's initiatives that improve its advertising bidding & result evaluation systems (and hence improve APRC). I believe such initiatives are key to future growth in Baidu's customer base & its revenues.

Stocks: BIDU