In the Oxford English Dictionary, a word is regarded as ‘obsolete’ or ‘archaic’ if no evidence of its written usage can be found after 1930. The term ‘BAT’ hardly fits that bracket, but it is showing signs of becoming outdated. Short for Baidu, Alibaba and Tencent, the acronym for the three titans has been a proxy for China’s technology sector for more than a decade. But the latest round of results announcements has indicated that search giant Baidu is no longer quite so mighty. In fact, it is close to slipping out of the top league altogether.
Last week the Beijing-based search firm reported its first loss since going public in 2005, posting Rmb327 million ($49 million) of red ink for the three months ended in March. The news sent its Nasdaq-listed shares down 15% the following day and shaved its market capitalisation to around $41 billion, or roughly a tenth of its major rivals, Alibaba and Tencent. For comparison, Alibaba reported a threefold increase in net profit to Rmb25.8 billion over the same period, and Tencent logged 17% growth to a record Rmb27.2 billion.
The drop in the share price also means that Baidu is now smaller in market capitalisation terms than younger internet brands such as Meituan Dianping – prompting some to say that ‘MAT’ would be a better descriptor for China’s top tech trio.
The poor results are a corollary of slowing growth and ballooning costs. Despite its ambitions to become a leader in artificial intelligence, the bulk of Baidu’s income is still derived from advertising on its eponymous search engine. Growth from this income stream slackened to 8% from 26% a year earlier, failing to keep up with the huge sums that Baidu is spending to acquire and retain its customers (see WiC439 for how the company is losing traffic). Marketing and administrative expenses for the period spiked 93% on the year. (This was partly down to its huge Rmb1 billion outlay to sponsor the CCTV Spring Festival Gala to promotes its new apps.)
Also dragging down Baidu’s bottom line are its commitments to spending big on research and development as it tries to diversify into newer product areas including autonomously driven cars and the Internet of Things (IoT).
In a letter to staff, founder and CEO Robin Li admitted that the company was in a “grim situation” but reiterated his strategy to “invest in return for growth”. Baidu has denied speculation that it is thinking about spinning off its self-driving car platform Apollo, which is chewing up substantial funding on a potentially lengthy payback period.
But in the wake of the losses it said it was restructuring its search business into a unit more focused on mobiles and smart devices. Indeed, it even renamed its “search business” as “mobile business” during the quarter.
One of the criticisms of the company is that it has been too slow to recognise the sea change from desktop PCs to smartphones and that it now risks a slow slide into obscurity rather like the way that Yahoo has been surpassed by Google and Facebook. In a bid to prevent that a managerial reshuffle will see Xiang Hailong, the former chief of Baidu’s search business (and a 14-year veteran) replaced by Shen Dou, who oversaw the development of short video app Haokan and Baidu Smart Mini Program, a platform for third-party apps to run inside Baidu’s ecosystem, similar to mini-programs on Tencent’s WeChat.
A key focus in the plan is to attract younger users to the apps on Baidu. Rivals like Bytedance have seized the initiative with innovative new products – from news feeds to massively popular short video apps – which means that they are winning a rising share of spend from the advertisers.
“[Baidu] has missed a lot of opportunities due to it constantly shifting directions,” complained Time News, noting that the company has previously invested heavily in gaming, on-demand delivery, and e-commerce – and yet failed to build any of them into competitive offerings.
“[Robin Li] wants to build a great company, and yet he is also apprehensive of the negative impact of the huge outlays on the company’s books,” the Guangdong-based publisher added. “A lack of resolve has made the company a laggard in many areas.”
In contrast, Alibaba put out solid results for the period. It cited deeper penetration into lower-tier cities, better user engagement through curated feeds and recommendations, and improved customer loyalty as reasons for the robust performance of its e-commerce business (where customer management fees and commissions were 31% higher versus a year ago).
None of the above could have been achieved without cross-selling across its many business units, enabled by investment in local consumer services (such as on-demand delivery platform Ele.me) and online-to-offline retailing. Last year it spent Rmb119.77 billion on acquisitions and strategic investments.
Synergies are already evident: almost 30% of orders at Ele.me, for example, were generated through Alipay and Taobao, according to the company. Customers at Sun Art, a bricks-and-mortar supermarket chain that Alibaba acquired and ‘digitalised’, get their deliveries through Ele.me as well.
Also known as ‘New Retail’, Alibaba’s O2O and direct sales segment grew 155% to Rmb40.1 billion in the quarter. That represented 11% of total revenues for a division that is already substantially larger than Alibaba’s next two fastest-growing businesses – logistics and cloud computing. Perhaps with this trend in mind, it announced last week that it has invested in Red Star Macalline (for more on this company see WiC145), purchasing Rmb4.36 billion of the retailer’s convertible bonds. The deal entitles Alibaba to potentially take a 14% interest in China’s largest furniture and home products retailer, which currently operates 364 home-furnishing malls across 199 cities.
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