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There's a Disconnect Between Shoppers and Merchants

Tim Culpan

(Bloomberg Opinion) -- Even if China's consumers are still willing to buy some products, companies lack confidence to shell out cash marketing to them. 

Take a look at Baidu Inc. which just reported second-quarter numbers. The results were bad. But more than anything, they highlight how this disconnect is playing out in the technology sector.  

China’s biggest search-engine operator posted a 3% drop in revenue at its core business — chiefly search advertising. Some analysts and reporters saw that as a win, having played into a classic sandbag and spin strategy — lower expectations, then when bad numbers come in, pretend they’re actually good. So let me reiterate: Baidu’s numbers are not good. And they’re about to get worse with third-quarter revenue forecast to decline once more. 

Set that against NetEase Inc., which also reported overnight. Like Tencent Holdings Ltd., its bread and butter is gaming, which saw solid growth during the June period. Its revenue in that category climbed 21%, not as good as Tencent’s 40%, but quite decent in the middle of an economic slump. 

There is growth outside gaming, too. Lenovo Group Ltd., which reported Thursday, managed a 17% rise in China sales, driven by demand for PCs and servers (to play games, perhaps?).  Smartphones slumped, however, with various research firms noting a double-digit decline in shipments. Interestingly though, Huawei Technologies Co. and Apple Inc. posted solid growth — which is significant because these two brands tend to offer some of the highest-priced models in the market.

One easy explanation is nesting: People just want to stay home and spend money on activities there. But I think over the next few months we’ll see that this doesn’t tell the whole story.

NetEase, Tencent and Lenovo benefit from having something that they can sell directly to the consumer — and in the second quarter it was clear there were people willing to buy at least some categories of products. Baidu and others in the ad business, meanwhile, rely on brands having the confidence to spend money, believing that sales will roll in later. Tencent highlights this split with revenue from media advertising  — placed on its content platforms — slumping 25% for a fifth straight decline.

Baidu itself cut its own marketing budget. At iQiyi Inc., its video-streaming subsidiary, membership revenue grew 19% (showing that there’s more eyeballs on the platform) but ad sales dropped 28%.

As we continue through earnings season, investors may want to keep an eye out for which companies have a direct relationship with consumers, and which merely rely on brands having the confidence to spend money and pitch to them.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

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