Tuesday, October 31, 2006

Another Yahoo? or still China's Google?

Baidu reported third quarter earnings today.

It was fantastic: 180% increase in revenue, 10 fold increase in profit.

No one can ask more, can we?

Frankly, we are quite disappointed. This quarter supposed to be a strong build up from last quarter with strong momentum in many fronts, especially continued market share gain and the release of new community based products.

However, as we suspected, Baidu's decision to replace channel partners with it's own sales force could have negatively impacted business in the quarter. Active online customers increased only by 13.3%. Many of these partners might have shifted their energy to work for Google.

For the next quarter, the projection is merely 15% increase quarter over quarter. We have expected Baidu's business to take off instead of maturing at this early stage.

Baidu has been heavily tauted as China's Google. We have to respectfully disagree. It looks more and more like another Yahoo.

Google has long realized that click through rate is more important than keyword pricing and have improved their ads ranking based on relevancy and likelihood of being clicked by users. Yahoo was late to do similar and being punished last quarter. Baidu is still doing the old "overture" way in disregard of user experiences.

Last quarter, Baidu had 40% quarter over quarter growth. Google had probably 70% quarter over quarter growth in China(estimated by last survey). When the new survey coming out, it's likely to show that Google probably continues to gain market share in search revenues thanks to Baidu's strain relationship with channel partners.

Again, longer term, it is hard to see how Baidu can compete with Google on capex front. Effort in capital expansion is much needed for Baidu sooner rather than later.


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