Google (NASDQ:GOOG) last Friday announced that it will be shutting down its China music download service, another move which limits the company’s potential to harness China’s large Internet user base. Google stated that the primary reason for the closure was a lack of profits and that an exit would allow the company to focus more its core offerings. 
As usual, what is bad news for Google in China tends to be good news for its competitor Baidu (NASDAQ:BIDU). The company has a competing music service, Ting, which is likely to gain market share due to Google’s exit. This is great news since Baidu has been looking to diversify its product mix and, with Google’s exit, it is likely to gain a dominant position in the Chinese online music space.
Ting Growth To Diversify Baidu’s Revenue
Currently, we think that Baidu is overly reliant on its search revenues, a division that makes up approximately 61% of its value. While it does have a dominant position in the Chinese search market with approximately 84% market share, the entry of an innovative competitor could get the company in trouble.
We think that an increase in Ting’s user base can be a big growth driver for the company’s display ad division, which currently makes up approximately 25% of its stock price. As users from Google’s service switch to Ting, we will see a bump in the number of Baidu users. If the company is able to retain these users and increase the number to approximately 750 million by 2019, we would see the division’s value increase to 35% of Baidu’s stock.
Ting Growth Can Be Leveraged for Other Services
The number of Chinese Internet users is growing at a rapid pace but is still at only around 40% of the population at 538 million.  If Ting can cement its leadership position in the online streaming music space, we think the service could be key in attracting new users onto the Baidu platform. Since users who use Ting are likely to use Baidu search, Ting’s growth could also help drive Baidu’s search revenue growth.
Additionally, the service’s success would give Baidu a platform to start a media store, similar to Google Play. The company could leverage a large Ting user base to sell movies, TV shows, sports and other media. This would further diversify Baidu’s revenue streams and provide it with a larger buffer against threats to its search revenues.
We currently have a $123 price estimate for Baidu which is approximately 10% above the current market price.Notes:
- Google to Shut Down China Music Service, Wall Street Journal [↩]
- Statistical Report on Internet Development in China, CNNIC [↩]