Wake-up call

Baidu's mobile success brings lasting pains

Baidu's mobile success is bringing its core search business lasting pains. Handheld devices now play a larger role than PC for China's biggest search engine. Yet revenue and margins have disappointed: advertisers aren't paying as much on smartphones, and rival apps make for fierce competition. Baidu's self-reinvention is necessary, but investors may not have realised how costly it would be.

The online giant entered the smartphone boom late two years ago, but revenue and traffic from its search app have just surpassed PC. Yet slower than expected growth in the quarter ending December sent its shares down 9.2 per cent in after hours trading on February 11. Even though mobile is now 42 per cent of total revenue, the company is still struggling to convert that into profits. Baidu acknowledged that advertising rates - the amount advertisers pay per click - on mobile devices stayed at last quarter's 60 per cent of PC's rates.

That's worrying for Baidu's core search business. The company made 99 per cent of its revenue from online marketing last year and the shift to mobile, though necessary, is squeezing its main source of profits. Unlike on a desktop where Baidu's search site is the most popular in the country, the company's apps have to compete for mobile ad dollars with rivals such as e-commerce giant Alibaba and video streaming site Youku Tudou. Social media and gaming giant Tencent recently debuted ads to its 468 million monthly active users on its chat app.

Investors may finally be losing patience. The company's operating margins have been declining steadily from over 50 per cent two years ago to 21 per cent now. Yet Baidu's shares have risen by over a quarter from a year ago. Continued investments outside of search and into online videos, mapping and e-commerce may lessen the company's reliance on ads in the future, but for now they spell further trouble for margins.