Baidu Maintains Lock On Search Revenue
Online search leader Baidu (Nasdaq: BIDU) has just become the first of China’s “big 3” Internet companies to release third quarter results, showing it’s not in any danger of losing its overwhelming share of China’s search advertising revenue anytime soon. Many media like to focus on the fact that Baidu has seen its dominance in China’s search market fall sharply over the last year, as newer rivals backed by Qihoo 360 (NYSE: QIHU) and Sohu (Nasdaq: SOHU) have collectively grown to take nearly half of the market by traffic volume. But while Baidu’s share of traffic may be sinking, it still holds the lion’s share of money that advertisers pay to search engines in China.
Baidu now controls about 55 percent of China’s search market, while Qihoo’s So.com has about 30 percent and Sohu’s Sougou has 13 percent. But despite that increasingly competitive landscape in terms of traffic, Baidu still collects the vast majority of overall search advertising revenue — a reality that’s not likely to change in the next 2 years and one that should provide some comfort for Baidu shareholders.
Baidu’s latest report shows it brought in about $2.2 billion in search-related advertising revenue in the third quarter, up about 52 percent from a year earlier. (company announcement) Sohu won’t release its own third-quarter data until next week, but it previously said Sogou generated $91 million in revenue in the second quarter.
Anyone with a calculator can quickly determine Sogou’s revenue was less than 1/20th of Baidu’s, even though its traffic share compared to Baidu was a much closer 1/4. That means that for every page view it gets, Baidu is earning more than 5 times much money than Sohu. The picture for Qihoo is probably far worse. Qihoo said in its second quarter report that online advertising revenue grew 89 percent for the period, largely driven by growth for its year-old So.com search engine.
But Qihoo didn’t give any actual search revenue figures, and I suspect the number was probably around the same or possibly even lower than Sogou’s. That means that if we’re generous and say So.com is now getting $100 million in quarterly revenue, it means Qihoo is getting about 1/20th the search revenue of Baidu, even though its search traffic share is about 1/2 that of Baidu’s. Thus Baidu is earning 10 times more in advertising revenue for each page view it gets compared to Qihoo.
If we assume these 3 companies control nearly all of China’s search market, Baidu now earns $2.2 billion of the broader market’s $2.4 billion in total quarterly revenue. That would give it more than 90 percent share, even though it only owns 55 percent share by traffic. Sohu and Qihoo collectively control the remaining 10 percent of revenue, far less than the 43 percent collective traffic share they have.
Baidu’s strong position in search revenue shows up on both its top and bottom lines, with revenue up 52 percent in the latest quarter and profit up 17 percent. The company predicted its revenue growth would slow slightly to 45-50 percent in the current quarter, but that’s still relatively consistent with its performance from the past year and quite impressive for a company of its size.
Baidu’s shares dipped slightly after the report came out, but are still up 25 percent since the beginning of the year. By comparison, Qihoo shares are down 17 percent from the beginning of the year, and have lost nearly half of their value from a March peak when investors were most bullish on the company’s search business. Sohu’s shares are down an even bigger 43 percent this year, as investors tire of waiting for Sogou to show results and its online video business suffers in a Beijing crackdown. Baidu’s stock is certainly commanding a nice premium now due to its ability to monetize its search business, and I’d expect it to continue getting a similar premium for at least the next 2 years.
Bottom line: Baidu is likely to continue dominating China’s search advertising revenue market for at least the next 2 years, as rivals Sohu and Qihoo struggle to monetize their own rival search businesses.
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