Baidu management said on last night’s earnings call that they plan to transform the company and expand it beyond a search engine. The company has been China’s most popular search engine for the last decade, but now it has Alibaba in its sights as it tries to make a mark in the online services industry.
Baidu gets into internet-based local services
Bloomberg‘s Tim Culpan reports that Baidu CEO Robin Li plans to use the company’s $12 billion in cash and cash equivalents to get Chinese consumers to purchase movie tickets and other local services online. Li said while their core search business is focused on connecting people with information, the shift toward mobile enables search to connect people with services in addition to information.
Baidu’s efforts put it in competition with Alibaba, Tencent and other industry participants in the online-to-offline business, although the search giant is at a pronounced disadvantage as it’s getting a very late start. Also Alibaba has plenty of cash to throw at O2O, as it’s sinking 3 billion yuan into its local services. Alibaba’s financial services arm is also investing another 3 billion yuan into it.
Baidu misses earnings estimates
The news comes as Baidu released a disappointing earnings report last night. Li is clearly seeking new revenue streams to make up for that disappointment. Despite the attempt to encourage investors, Wall Street was clearly unhappy with the second quarter report. Shares of Baidu declined as much as 17.61% to $162.87 per share at the NASDAQ during regular trading hours today.
In order to enter the O2O market, Baidu management said they will up the company’s administrative expenses by up to 90% in the second half of this year. That will put even more of a damper on the company’s earnings as the rapidly increasing costs have already been weighing on them.
How long will it take?
Last night’s earnings report was the first to include a breakdown of results from Baidu’s O2O business, which recorded 40.5 billion yuan in gross merchandise value. That’s more than double what it was a year ago. Li expressed commitment to improving Baidu’s placement in O2O by spending billions of yuans. The question now is how long it will take Baidu to gain traction in the industry and how many billions of yuans it will take.
It’s possible that just like with Amazon, investors will eventually get tired of waiting to see results from the increases in spending. Today’s share price decline indicates that investors are already worried about those increases.