Chinese Internet, Mobile, and Social: An Overview

According to a Gartner report, worldwide revenues from mobile advertising are projected to grow 400% over the period 2011 through 2016 to $24.5 billion. Gartner estimates the market to grow from $9.6 billion last year to $11.4 billion in 2013, driven by the economies of China and India as their growing middle classes become a more attractive advertising target for global and local brands. Another researcher, Informa, estimates that China will have more than 354 million smartphone subscribers by the end of this year, compared with the 219 million smartphone users in the U.S. China smartphones account for a comparatively lower 29% of total mobile phones in the country. In the U.S., smartphones account for 58% of the mobile phones. The increased use of smartphones in China will help drive the growth of mobile advertising there. Chinese internet giants are increasing their online offerings to take advantage of this mobile boom.

Baidu’s Financials
In the recently reported first quarter results, Baidu’s (Nasdaq:BIDA) revenues grew 40% over the year to $961 million, but missed the Street’s projections of $969 million. EPS of $0.95 was also short of the market’s projections of $1.03 for the quarter. Earnings took a hit as Baidu increased advertising spending and R&D spending for the quarter. Sales and administrative expenses grew 77% and R&D expenses 83% over the year, respectively. The investment in advertising campaigns for mobile search helped increase the number of daily mobile search users 25% over the year to 100 million.

Baidu continued its leadership in search in China with a 78.6% market share. Google was a distant second with 14.4% search market share. Within mobile searches, Baidu lost ground to its competitors as its share fell from 77.4% in July 2012 to 66.9% in March 2013. Qihoo 360 has taken some of the lead as it rose to second place in mobile searches with 13.4% market share.

Baidu’s Online Video Offering
Baidu plans to grow its market reach, especially in mobile through acquisitions. Recently, Baidu announced the acquisition of Internet video provider, PPS, for an estimated $370 million. PPS is a peer-to-peer video streaming site that has its strength in delivering video content via mobile terminals or software. PPS has also managed to reach in China’s smaller cities. iResearch estimates the online video industry in China to grow to RMB 33.2 billion (~$5.4 billion) in 2016 from RMB 6.3 billion (~$1.02 billion) in 2011. Following the acquisition, Baidu will merge PPS’s offerings with their other video offering, iQiyi, to deliver China’s largest online video site both in terms of viewing time and mobile users. The acquisition will not only help Baidu improve its video offerings; PPS’s mobile strength will also help it to address the mobile market.

Baidu’s stock is trading at $90.50 with a market capitalization of $31.65 billion. It was trading at 52-week highs of $134.71 in August 2012.

Alibaba’s Market Expansion
Meanwhile, Baidu’s competition is heating up as other Internet players try to make it big in the search market. Recent market rumors are speculating about the entry of Chinese e-retailer, Alibaba, into the search market. According to reports, Alibaba may be evaluating an acquisition of Sohu’s search engine, Sogou. Sogou has an estimated 10% share of the Chinese search market. It was earlier said to be on the acquisition radar of both Qihoo and Baidu. Alibaba is eying the search market not only for its margins, but also to help drive more traffic to its own retail sites Tmall and Taobao.

It is not just search that Alibaba is expanding in. Earlier this year, the company paid $294 million to buy 28% share in AutoNavi Holdings. AutoNavi Holdings is the leading provider of digital maps and navigation offerings in China. The company accounts for nearly 30% of the downloaded mobile app market share in China. Through the investment, Alibaba plans to deliver improved lifestyle applications to clients.

In addition, Alibaba also acquired an 18% stake for $586 million in Sina Corp’s microblogging service, Weibo, to target advertising revenues on social networks. Weibo is China’s equivalent of Twitter and gained popularity when Twitter was blocked in China by the government. Today Weibo has an active user base of more than 500 million Chinese users. Alibaba also plans to leverage Weibo to drive more traffic to their sites.

Alibaba’s Financials
Alibaba de-listed last year, and detailed financials are no longer published. However, Yahoo still owns 24% stake in the company and includes a snapshot of Alibaba’s financials in its own quarterly filings. According to those reports, Alibaba’s revenues grew 80% in the December to $1.84 billion. Earnings in the quarter doubled to $642.2 million.

Analysts are waiting for Alibaba’s IPO expected later this year. Analysts peg Alibaba’s valuation at more than $100 billion when it lists.