Baidu's Tiny Earnings And The Chinese Search Market

Baidu (NASDAQ:BIDU) impressed Wall St. with its fourth quarter 2009 earnings. Revenue rose 40% to $185 million and net income was up 48% to $63 million. Investors are impressed enough with Baidu’s numbers to give it a market cap of $15 billion, but it is still a tiny company with almost no prospects outside China where it is the No.1 search engine by far based on a market share that is said to be 70%.

China has an internet population of nearly 400 million people so analysts have to wonder why Baidu is as small as it is. Google,which is the leading search company in most Western nations, had revenue of almost $6 billion last quarter.

Google says it may leave China due to issues of cyberattacks on its servers and the central government’s censorship policies. Baidu’s modest results are a sign that the search market in China is immature, or that search will never be much of a business in the world’s most populus nation. Baidu is trapped within Chinese borders to the extent that Google and Yahoo! control search market share in most developed nations and local products have dominant positions in Russia and many other developing nations.

It has not occurred to many people who follow the global search business, but the Chinese online population may not use products like Google and Baidu the way that people use them in America and Europe. The ability to quickly find relevant results from web search is almost certainly valuable everywhere. But, internet users in China may not be inclined to use the text ads that run next to most search results and those text ads are the primary source of search engine sales. Revenue for Baidu will always be stunted if the revenue model that Google has built does not work well in China. The common assumption among analysts is that the habits of web search users are common around the world. That may not be true at all.

Search engines are valuable to internet users everywhere. Text advertising may not be. If that is the case, the Chinese search industry may never be a financial success, and Google’s trouble in China may not hurt its prospects at all.

Douglas A. McIntyre