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Baidu.com, Inc. (ADR) (BIDU): Oh, The Mobile Potential!

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Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s fourth quarter earnings for 2012 were in line with the street’s expectations. The transition from PC to mobile led to a 42% increase in sales year over year — leading to total sales of $1 billion. Online customers accelerated 31% year over year, up from 28% last quarter and 13% a year ago. Though Baidu’s dominance in PC search is expected to decline over time due to rising competition from Qihoo 360 Technology Co Ltd (NYSE:QIHU) the incremental shift towards mobile search should offset this loss in PC search.

The Mobile potential

According to CNNIC, 51 million new Chinese users accessed the Web in 2012, taking the number of total online users in China to 564 million, an increase of 10% from 2011. This has raised the country’s internet penetration rate by 3.8%. In China, mobile search is in an infant stage in comparison to the matured PC search. Unlike advanced economies like the U.S., Europe, and South Korea where Smartphone penetration is around 50%, China has less than 20% penetration in this segment. This makes China one of the lucrative markets for search companies.

Baidu.com, Inc. (ADR) (NASDAQ:BIDU)To monetize this opportunity, Baidu.com, Inc. (ADR) (NASDAQ:BIDU) has enriched its mobile service offerings with Baidu map, Baidu Cloud and new Baidu mobile browser. 80% of the Android based smartphones sold in China have Baidu’s services pre-installed along with Baidu as the default search engine. Consequently, the company has seen a 1,000% increase in mobile visits from the start of 2010 to Dec 2012.

Maps: In the fourth quarter, Baidu.com, Inc. (ADR) (NASDAQ:BIDU) Map installation increased 50% quarter over quarter with around 3.5 million daily active users and the company is already a leader in the map market. Baidu Map has around 100 million active daily users in comparison to Weixin’s 60 million and Weibo’s 40 million. However, Autonavi with 21.60% market share is posing a big threat to Baidu in this segment. Autonavi provides mobile mapping services for Apple Maps and Qihoo 360 in China and offers its own Android app.

Mobile browser & Search: The updated version of Baidu Explorer is 30% faster and provides faster downloads even with slow connections via data compression technology. Additionally, in order to increase its international presence, Baidu.com, Inc. (ADR) (NASDAQ:BIDU) has teamed up with France Telecom to develop a mobile browser tailored to suit customers in Africa.

The only threat to date for Baidu in this segment is Qihoo 360 browser. Baidu’s search traffic dropped in September 2012 after Qihoo 360 Technology Co Ltd (NYSE:QIHU)’s entry, but because of Baidu’s superior search results, it bounced back in November 2012 and has been stable at around 80% since then.

Developer focus: Baidu.com, Inc. (ADR) (NASDAQ:BIDU) aims to make a favorable ecosystem for mobile app developers by offering a low-cost development environment and effective distribution channel. To date, Baidu has lured over 100,000 mobile application developers towards its platform. In addition, Baidu recently signed a deal with Intel to create software for the growing Chinese mobile market which will further enhance its grip on mobile search.

Competitors’ Mobile strategy

Mobile internet in China is highly competitive. Tencent owns the largest community of around 300 million registered users for its mobile communication tool – WeChat, which is a widely used smartphone text and voice chat platform. WeChat’s popularity on mobile devices has given Tencent a perfect platform for rolling out mobile ads.

SINA Corp (NASDAQ:SINA) on the other hand, has over 400 million Weibo users and generates over 70% of its traffic from mobile devices. Weibo’s user base has grown 82% over the past year. Recently, Sina formed an alliance with Alibaba to explore social commerce and develop innovative marketing solutions. This platform will bring unique services to Weibo users, and will also make mobile internet a core part of Alibaba’s strategy, and it will further boost Sina’s presence in mobile Web. This partnership will generate about $380 million revenue for SINA Corp (NASDAQ:SINA) for the upcoming three years.

Search giant Google Inc (NASDAQ:GOOG) is in all sorts of trouble in China. Its services are unfairly slowed and deliberately broken down by “China’s Great Firewall” which is making it difficult for Google Inc (NASDAQ:GOOG) to survive in the Chinese market. Consequently, it is lagging far behind in the mobile search market.

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