Robin Li: How to deal with profitability at growing stage

Jointly sponsored by Institute of Industrial Economy from Chinese Academy of Social Sciences and China Business magazine, Annual Forum of Business Competitiveness 2005 opened in Beijing on November 4. Baidu's Robin Li gave a speech at the meeting.
Li: Hello, everyone. I'm happy to have this opportunity to talk to you. Today's topics are very interesting. I'd like to share with you some of my thoughts on Baidu's financial situation and products. A few days ago, Baidu reported it's third quarter earnings. It's the first quarter after Baidu's IPO as well as our first quarterly report after IPO.

Our report was the top headline in Yahoo's Business section which tells that the investment world pays great attention to us. We had issued a projection at our Q2 reporting that predicted revenue growth of 11% to 16% over second quarter. When we reported Q3 earnings, our actual growth reached more than 28% quarter over quarter or over 30% in dollar terms. Inside Baidu, we were very excited about this growth which was far better than we had anticipated. However, Wallstreet had very high expectations before we reported earnings and investors pushed our stocks much higher the day before our reporting. It has since fallen back. I looked at all the media reports that said net income was not as good as expected. Per share earning of 3 cents fell short of the 4 cents expected by US estimates. It reflected in the stock's performance later. Through this case, I would like to talk about how to treat profitability during a company's development stage.

Inside Baidu, our development strategy is to focus on cultivate and educate the market instead of short term earnings. We have been pursue this for many years and we have communicated with investors on this during our road show for IPO. I think we made it quite clear. Earlier in our development, Baidu started search service for the internet end users on Sept. 20, 2001. At the same time, we started bidded ranking services. At the begining, the majority of businesses in China did not understand the commercial model. They did not know how this model can promote businesses' products and services. So we needed to educate a market. The early adopters are those who understood internet better. They were actually not large enterprises but some like online flower shops. We often heard our customers told us that they spent several yuan to gain a new customer and if the customer makes a purchase, they could earns dozens of yuan. Initially, Baidu made very small amount of money on each deal. As the whole company, not to mention about making a profit, we lost money and we lost big money. After the market matured, we increased our starting bid price from about 1.2 cents to 3.5 cents, our customers' enthusiasm increased rather than lowered. In the just passed quarter, more than 12,000 active customers joined Baidu's bidded ranking service. It is our largest quarterly new customer gain. The process boosted our confidence. The market in China needed our cultivation. There are only 50,000 to 60,000 businesses are using bidded ranking service. It is a small portion. If we can help more businesses to know that it is a very good promotion method for their services, they will accept it and be willing to join us. The total profit will gradually expand. This has been our thinking during our many years of operations.

In the nearly six years of Baidu's existance, China's internet industry had six years of dramatic up and downs. Initially, there was the internet bubble, then many business models developed. Portals were very hot early on. Many web companies built portals, but Baidu did not. Later, short messaging expanded. Not only portals made money on short messaging, many other service providers also made much money on short messaging but Baidu did not. Baidu did not chase these fast money businesses. Again, the online gaming appeared and that created several great companies. Online gaming is also a big money maker, but Baidu still not participated. We persistently focused on cultivate our own market, that is the search engine or bidded ranking service market. We think as time goes, more and more will know that it is the best model for promoting their products and services. That is why we always making effort towards this direction. We relentlessly cultivate the market and educate our customers at the same time we improve our search engine technologies. Every year, we hold road shows in about 20 cities nationwide. We tell the local businesses what is bidded ranking service and why it is the best way to promote products and services. We tell them how to analyze the result. Many times, they spend money other ways and have no way to know the results. When they come to Baidu, we can direct them to see how we can bring customers to their web sites through clickthroughs and what they do after entering the web sites. They can see how many inquiry phone calls it can bring and how many orders it can bring. A customer has a life cycle. After the first order, you can expect the second or even the third. So the capability of bringing in new customers is very important for a business's development. Especially at today's low margin environment, how can you survive and grow bigger? Perhaps you cannot make much money from every single customer, but you can make much more when you reach a certain scale.

I just talked to several people. Many of the businesses that are making money actually are low margin business. They have very large market and large scale of customers and they are making more and more money. Personally, I think bidded ranking service is exactly for attracting customers. It creates the economy of scale for businesses and products.

Thank you!

(source：tech.sina）