Baidu Diversification Sputters With E-Commerce Flop 乐酷天将关停百度电商战略再折戟

By newsdoug on April 23, 2012

Lekutian: Baidu's latest failure Internet giant Tencent (HKEx: 700) might want to take a look at online search leader Baidu (Nasdaq: BIDU), as the former defends itself in a lawsuit accusing it of using its hugely popular QQ instant messaging platform to dominate other areas of the Internet. Just days after the opening of a trial in a Guangdong court accusing Tencent of abusing its QQ monopoly status, word has emerged that Baidu will close its latest e-commerce site, called Lekutian, less than 2 years after launching the service with Japanese e-commerce leader Rakuten (Tokyo: 4755). For anyone who has failed to miss the connection, my point is this: having monopoly status in one area of the Internet doesn’t necessarily guarantee success in other areas — a reality that Baidu illustrates after numerous failed initiatives outside its core search business. Let’s take a look at the facts first. Rakuten has said it will shutter Lekutian due to stiff competition in China’s overcrowded e-commerce space (English article), and a visit to the site reveals the closure will come this Friday. Confirmation of the closure comes after rumors had swirled for the last month over the future of the site, which Baidu and Rakuten launched with fanfare in 2010 just as more established e-commerce players like 360Buy and Dangdang (NYSE: DANG) were starting to raise hundreds of millions of dollars in new funds for aggressive expansions. Just 2 weeks ago, domestic media reported that Lekutian was making large layoffs and preparing for a major directional shift that would see it focus on its Japanese roots to offer more Japanese products. (previous post) The company denied the layoff reports though it did openly talk about the shift to a more Japanese flavor. Clearly Rakuten was having second thoughts about the shift even then, and has decided to shutter the business altogether, in what looks like a wise move to me that will inevitably see Baidu take yet another charge, probably in the tens of millions of dollars, when it announces its second quarter results in July. I say “another” charge, as this failure is hardly new for Baidu, which has yet to find success outside its core search business despite numerous attempts. Its first major e-commerce initiative, a service called You’a, never gained any traction and was later quietly folded into other services after the Lekutian venture was announced. Last year Baidu also quietly shuttered its Twitter-like microblogging service, which again failed to compete with rivals, including Sina’s (Nasdaq: SINA) wildly popular Weibo. (previous post) Baidu’s main overseas investment, a Japanese search site, has also been largely a flop, failing to gain much traction in that competitive market. All of these flops for a company with near-monopoly status in China’s lucrative online search market are all the more interesting in light of the Tencent trial, which began last week as the result of a lawsuit filed by Internet security software specialist Qihoo 360. (previous post) Qihoo alleged that Tencent used QQ’s near monopoly status in instant messaging to dominate other areas, such as the online game space. I would tend to agree with Qihoo’s argument that companies that dominate one space like Tencent do have an unfair advantage when developing related spaces, and should be legally restricted from using that advantage to stifle competition. At the same time, Baidu, which controls more than 70 percent of the online search market, the legal definition of a monopoly, certainly shows that just having domination in one area doesn’t guarantee success in others. I attribute Baidu’s lack of ability to parlay its search dominance into other areas to a general inability to execute new business plans, even though it clearly has many advantages over its rivals. At the end of the day, its inability to develop new businesses does work to Baidu’s advantage in one sense, since Qihoo and any other rivals will never accuse it of using its near monopoly status in search to unfairly dominate other areas of the Internet. But at the same time, its repeated failures to diversify also leave Baidu highly vulnerable to lawsuits from the anti-monopoly regulator itself, which has voiced dissatisfaction in the past and could easily take legal action to bring more competition to China’s online search market this year or next.

Bottom line: Baidu’s latest e-commerce failure reflects an inability to parlay its online search dominance into new areas, as it remains open to anti-trust action due to its monopoly in search.

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