Alibaba’s Acquisiton Of UCWeb Could Be A Threat To Baidu’s Mobile Plans

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Earlier this month, Chinese e-commerce giant Alibaba announced its decision to acquire the remaining shares of UCWeb, a company in which it already owned a 66% stake. UCWeb operates China’s leading mobile browser and mobile search engine. Although Alibaba did not declare the value of the cash and stock deal, it said the purchase values UCWeb higher than last year’s $1.9 billion acquisition of mobile app store 91 Wireless by Baidu (NASDAQ:BIDU). The acquisition comes ahead of Alibaba’s much anticipated IPO scheduled for August 8. The company is expected to raise more than $15 billion through the offering, valuing the whole company at about $168 billion. [1]

UCWeb provides several smartphone services including a browser, a search engine, an app store and a gaming platform. Its mobile browser has more than 500 million users globally (based on monthly active users for both Android and iOS) and about a 65% share of China’s mobile browser market. [2] The company is also strong in mobile search and gaming. Its recently launched mobile search engine, Shenma, which processes over 6 billion mobile search queries per month, has acquired more than a 20% share of China’s mobile search market. Meanwhile, its gaming platform 9game.com averages 60 million users every month who play nearly 1,000 online games. [3]

UCWeb is not the market leader in China alone. Last year it surpassed Opera as the most popular browser in India and now has over a 30% share in the country, according to StatCounter’s statistics. The company has at least a 10% market share in 10 countries across the globe. [2] It is particularly strong in developing nations such as Russia, Vietnam and India, where it is experiencing triple-digit growth in users due to its data compression technology that minimizes the cost of browsing and downloading. [4]

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Once the acquisition is complete, UCWeb will be fully integrated into Alibaba as the UCWeb mobile business group. The division will be responsible for handling the browser, mobile search, location-based, mobile gaming, app store and mobile reader services. The acquisition poses a threat to Baidu, the Chinese search giant (73% search market share based on page views) which has been pursuing aggressive expansion in the mobile space to increase its market share and enhance monetization.

Baidu Has Been Aggressively Pursuing Mobile Expansion

Until mid-2013, there were concerns surrounding Baidu’s mobile monetization capabilities. To tighten its grip on mobile, the company invested in various parts of the mobile ecosystem last year. First, it introduced an integrated PC and mobile bidding system which contributed to increased advertising on the mobile platform. Second, it undertook a nationwide search engine marketing campaign with heightened focus on mobile to bolster the adoption of its mobile products. Third, it acquired 91 Wireless Websoft in a $1.9 billion deal to strengthen its app distribution capabilities. 91 Wireless is the largest third-party app distribution company in China with over 40% market share. And fourth, it acquired Nuomi from Renren to strengthen its location-based service offerings on Baidu Maps.

Baidu’s efforts have helped it to reach over 400 million activated users for its search app. The company witnessed 160 million daily active mobile search users in Q1 2014, up by 60% compared to the year-ago quarter. It has also seen an improvement in mobile advertising rates (cost per click), which have reached more than 60% of PC advertising rates from 55% in Q3 2013. Baidu’s top line also reflects the growth the company has seen in traffic and monetization. The contribution of mobile to Baidu’s total revenue is now over 20% compared to 10% in Q2 2013. [5]

Baidu’s selling, general and administrative (SG&A) expenses jumped by 137% year-on-year in Q1 to about $300 million, due to an increase in promotional spend for mobile products. The company has more new products for mobile in its pipeline, and therefore intends to continue investing heavily on driving installations and usage of these mobile products, even though this will weigh on its profitability. [5]

UCWeb Acquisition Could Hamper Mobile Traffic And Monetization Growth For Baidu

Baidu is expecting mobile traffic to surpass PC traffic sometime this year. It also expects the gap between mobile and PC advertising rates to continue to narrow as the mobile ecosystem continues to mature and customers witness stronger return on their advertisements. However, things may not pan out as anticipated for Baidu, since UCWeb has gained access to Alibaba’s vast financial resources. Alibaba had more than $6 billion in cash and cash equivalents at the end of 2013.

The majority of Baidu’s mobile search traffic is generated internally. The company has to share revenue with third parties for the remainder of the traffic. According to estimates by the Maxim Group, Baidu may be getting about 30% of its total search traffic from UCWeb. [6] We believe that UCWeb will now look to strengthen its own mobile search engine, Shenma, to compete with Baidu in mobile search, and its app store, UCapp Store, to compete with Baidu’s 91 Wireless.

We have a $175 price estimate for Baidu’s stock, in line with its current market price.

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Notes:
  1. Alibaba to Acquire Rest of UCWeb to Boost Mobile Offering, Bloomberg, June 11, 2014 []
  2. Here’s to the Next Milestone! UC Browser Surpasses 500 Million Global Users, UCWeb Website, March 20, 2014 [] []
  3. Alibaba’s big mobile buy — what were they thinking?, Market Watch, June 15, 2014 []
  4. Mobile browser-maker UCWeb, another global tech firm under the radar, crosses 500m users, The Next Web, March 21, 2014 []
  5. Baidu’s CEO Discusses Q4 2013 Results – Earnings Call Transcript, Seeking Alpha, February 27, 2014 [] []
  6. Baidu: Mobile Search Fragmented, Hard To Dominate, Barron’s, May 14, 2014 []