Why Baidu will continue to invest in new mobile products in 2014

Market Realist

Why Baidu focuses on mobile as its Q4 top-line grows fast (Part 3 of 3)

(Continued from Part 2)

Baidu’s investment in key strategic areas

In the previous article in this series, we talked about the large increase in operating expense in Q4 and fiscal year 2013. The company also provided an outlook for 2014, in which it mentioned that it expects its profits to remain flat, as it plans to continue to investment in key strategic areas. During the earnings conference call, the company mentioned that these investments will bring significant returns. Robin Li, chairman and CEO of Baidu, commented:

“So in addition to search, we are now also strategically focused on the following four areas, one, mobile and cloud; two, location based services; three, consumer products, including gaming, music, online literature and social; four, international operations. We also have invested in entities that are very strong in their respective industries, of online travel and online video. We are leveraging our strength in search in each of these areas, all of which represent large and exciting opportunities. And we are confident that the investments we are making will generate significant returns for Baidu, in the long run.”

Baidu to also invest in new mobile products in 2014

The company also mentioned that it expects expenses to continue to go up in 2014—especially for new mobile products in the pipeline. Mobile has become an important component for search advertising companies. This is where major search companies like Google (GOOG), Microsoft (MSFT), and Yahoo (YHOO) are also trying to increase their presence in mobile search. Google has kept its Android operating system free so as to monetize through Google search advertising on mobile. Now it’s dominating this market, with a market share of about 80%. Microsoft is trying to increase its presence on mobile through Windows Phone software, and though it succeeded in doubling its smartphone volume in 2013, its market share of 3.3% is far too low to be a threat. However, it did acquire Nokia’s (NOK) mobile business in late 2013, and it will be interesting to see how will this benefit Microsoft in 2014.

As per the above chart, Baidu’s net profit margins declined in 2013, and they will continue to decline in 2014. However, the company is consciously allowing its margins to get hit in order to grow its revenues fast. The main motivation behind this is Baidu’s quest to gain search advertising market share. According to Jennifer Li, the CFO of Baidu:

“In terms of areas of spend, particularly in terms of cost buckets, you should expect very aggressive sales and marketing spend going into 2014. As you see, in 2013 we established pretty solid positions for our mobile search and mobile map products. Going into 2014 we have new products that’s in the pipeline and will kick in full gear to promote these mobile products, mobile products, such as Mobile Assistant, Mobile Guardian, as well as location-based services embedded on top of our search.

“So most of the spend will be for these new products, and at the same time, we’ll continue to expand infrastructure, expand on content costs for IT, and also take advantage of our network, our union networks, to continue to promote our products. So these key cost items, as I’ve identified early, would be the important cost items as you look at 2014.”

To learn more about investing in Baidu, see Must know: Why did Appaloosa buy a stake in Baidu?

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