Those who are familiar with China’s internet scene would have heard the term “BAT” – which is the acronym for “Baidu, Alibaba & Tencent”, the three dominant players occupying search, ecommerce and social network respectively.
However, over the past year, Baidu, the ‘B’ of BAT, was routinely left out when people referred to the Chinese internet giants. “AT” has become the norm – some people even added J (JD.com), D (Didi Chuxing) and another T (Toutiao), but not B.
The trend has been even clearer after Alibaba’s historical IPO in 2014. Over the last 3 years, Baidu’s market cap has been rather flat, while Alibaba and Tencent continued to break records (Tencent even briefly overtook Facebook a couple of weeks ago).
Missing the mobile revolution
Why did this happen?
Well, let’s look back a bit into the history, however recent that is. In 2010 Google withdrew (or was blocked) from Chinese market. Baidu, suddenly losing its biggest (and stronger) competitor, spared no time to occupy the search market space and reap the benefits.
In a way, money was too easy for them. Advertisers flocked in and soon the first screen of any search (of commercial value) was filled with ads. Baidu’s other internet traffic products also became money making machines.
The result of easy money is, you get complacent. Smartphones were quickly spreading, aided by China’s electronic manufacturing prowess as well as the leaps in infrastructure funded by state-owned telcos. Alibaba and Tencent left no time to catch this wave of disruption, developing new products, refitting existing products to mobile, and iterating user experiences.
The result? People in China nowadays are used to searching for content on WeChat (owned by tencent) and searching for products on Taobao or Tmall (both owned by Alibaba), not to mention that most other mobile products provided a (usually pretty decent) search function of their own.
So apart from content or products, what else do people search for? Baidu’s market relevance has shrunk dramatically.
Moreover, Baidu is still mainly reliant on ad spaces and apart from Baidu Map, you can’t find another Baidu product that is well penetrated into consumers’ smart phones.
Ask customers who regularly use Baidu, they often tell you stories of frustration. I have not seen a single Baidu customer who has ever used Google saying anything good about Baidu.
For example, when we did a couple of searches for recent news, or products, the results on Baidu left a lot to be desired (see below).
Temptations & Scandals
Internally, easy money brought a lot of pressure (and temptation) to those involved, corruption scandals came one after another. The death of a university student after taking treatment advice searched from Baidu (who turned out to be paid ad in disguise) last year became not only a PR disaster, but also major equity researchers to downgrade Baidu’s stocks.
The same thing happened to Taobao before, and Jack Ma took a radical approach, sacking many key employees, including the then CEO David Wei (who later founded a venture capital firm that led the investment into Ezbuy). Ma also sent a staunch internal circular reiterating the company values and zero tolerance to anything that undermine them.
However, for a long time, Baidu took only reactionary measures to the irregularities, sacking those involved without changing the core. Any time lost to this is time lost to competitors, in the fierce competitive environment in China.
Other than the core business, Baidu’s investment decisions also created lost opportunities to fully leverage online to offline opportunities.
While Tencent and Alibaba captured a lot of valuable IP and companies, Baidu was late to the game and left picking from the scraps.
Back in 2012, Baidu’s CEO Robin Li said that investment in mobile internet was like drink-driving, exciting but dangerous. Such pessimism was reflected in their investment into O2O territory.
Another disadvantage is that (as they had less relevant traffic) Baidu could not provide as much volume of data to its new companies when compared to Alibaba and Tencent.
The absence of Baidu in electronic payment is rather vital. Alibaba, Tencent and even JD.com all have their own payment arm with millions upon millions of users. Baidu, meanwhile, has fallen into a vicious cycle – no payment app to support the integration of mobile services, and not enough volume to accelerate the growth of Baidu Wallet.
Although Baidu partnered with China CITIC Bank to found AiBank, the first mover advantage has been lost to Alibaba and Tencent. The future of Baidu in finance is still not promising at the moment.
Lack of coherent international strategy
In the meantime, Baidu’s international strategy was also unclear. It has made money in packaging and reselling traffic in many countries, but did not have a coherent strategy to differentiate themselves from thousands of other resellers of consumer traffic.
It hired a lot of ambitious and talented executives to develop international markets, but if you sit down with them, they would often tell you not the grand vision (or its execution) but complaints about lack of direction (and often lack of things to do). I personally know quite a few people who left the comfort at Baidu to startups where they could actually do something.
To be fair, Alibaba & Tencent made a lot of mistakes while expanding to the international markets. However, the key difference here is, AT experienced, learnt and moved forward with refined (better) approaches. Baidu stagnated.
All in with Artificial Intelligence (AI)
Baidu recognised its woes, and vowed to change radically. A few steps were taken: cutting the losses of O2O, professionalising its investment team & processes, and a bullish focus on AI.
The AI push might be a bright spot in this. It hired Qi Lu, a well-known software executive previously working for Microsoft, to lead these efforts in the capacity of COO; it opened up its driverless car efforts to the ecosystem of third party partners; it is also aggressively pushing DuerOS, Baidu’s answer to Amazon’s Alexa.
This is a huge gamble. While everyone knows and agrees on the huge potential of AI, nobody is quite sure about the path getting there. The development of AI required not only tremendous investment in talent and time, but also massive amount of data and applications to make the leap.
A key problem here is that, the data Baidu owns are not as rich or relevant as those of Alibaba or Tencent. The main source of data of Baidu comes from its search engine, which barely scratches the surface of the truth value underneath. In the contrary, Alibaba and Tencent both have access to – at the very least – consumers’ spending behaviours and transaction records. With this information extracted from later stages of the customer journey, Alibaba and Tencent can easily dig out valuable insights from big data to train their AI to be more relevant, quickly.
Baidu has the best Map in China, you might say – but so is Alibaba (which acquired Gaode), and Tencent (which developed its own). AT can link data captured from the map to other use cases, Baidu would find it hard to do so.
Roads ahead for Baidu
Nevertheless, Baidu is still an internet giant with annual profits of $250 million in 2016 and plenty of cash to spend. This gives the company enough room to maneuver towards a turnaround and perhaps eventual catch-up.
The bet of AI has unknown outcome (and potentially huge rewards), but it should not be the only bet that Baidu has. Its strategy team (and senior leadership) will need to be very alert over the next few years to avoid another misstep, while trying to recover grounds lost.
Thanks for reading The Low Down, insight and inside knowledge from the team at Momentum Works. If you’d like to get in touch with us about any issues discussed in our blog, please drop us an email at [email protected] and let us know how we can help.