Weekly Chinese Internet Notes: Baidu In Focus

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In this Chinese Internet weekly recap, we catch up with online search giant Baidu (NASDAQ: BIDU). Baidu made news this week for various reasons. It released further details of its smart bike, courted controversy by reporting discrepancies in rival Qihoo’s business practices and subsequently got sued, while video hosting site IQiyi, which constitutes a little under 8% of our price estimate of Baidu, received $300 million in funding from mobile phone maker Xiaomi.

Our price estimate for Baidu’s stock is about $225, which is slightly below the current market price. It was not a great week for Baidu, as its stock price dropped about 5% through Thursday. We forecast 2014 revenues of $7.7 billion for Baidu in 2014, which is slightly lower than analyst consensus estimates compiled by Bloomberg Businessweek. [1]

Details Emerge On DuBike

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Baidu has been working on a smart bicycle that will make cycling workouts more effective and social (see previous Weekly Chinese Internet Notes). This week the company posted photos and videos of the device on its website. The device, called DuBike, is expected to become available for sale in China by the end of the year. The bike helps gauge the effectiveness of exercise by measuring various health metrics. It also facilitates route guidance through indicators on its handlebars. Riders can locate friends nearby and share route maps with them over the Internet, making the workout more social. Additionally, it features a bike locating system to aid recovery of the bike in case it gets stolen. The bike recharges its battery during cycling and therefore does not need to be plugged in for recharging. [2]

Baidu Gets Sued By Qihoo

Baidu got sued this week by online search rival Qihoo for 5 million yuan. Baidu had put up certain posts on its websites alleging that Qihoo was behind a recent virus attack that affected a large number of Apple products. This attack compromised sensitive user information. Baidu’s posts alleged that Qihoo, which also sells antivirus products, had invested in an online company identified as the source of the virus. Qihoo had gone on to release an update to its users that removes this virus from their devices. The posts allege that Qihoo released the virus as a scare tactic to boost sales of its products. [3]

Such legal battles have happened before in the hotly contested online search market in China. Baidu has a market share of over 80% in the Chinese search market, while Qihoo has a low single digit share. [4] There have also been reports that Baidu had gained the lead over Qihoo in transitioning to mobile search. [5] In fact, the third quarter of this year marked the overtaking of PC traffic by mobile traffic on Baidu’s network (see our article on Baidu’s Q3 Results).

Xiaomi Invests In IQiyi

Xiaomi has invested $300 million in online video hosting service IQiyi, aiming to generate content for Xiaomi’s foray into the smart television market. Xiaomi is the fifth largest mobile phone maker in the world and the market leader in China. The collaboration could increase IQiyi’s user base among Xiaomi users, both on the smart TV and mobile platforms. IQiyi’s content, including licensed Hollywood movies and U.S. TV shows, will also help Xiaomi attract customers to its smart TVs. [6]

IQiyi has also embarked on crowdfunding of movies. Its first project, a movie called The Golden Era, raised $3 million in 3 minutes through crowd funding. It intends to make 8 more films next year and license over one thousand Hollywood movies for distribution in China. [7] Meanwhile Baidu, the largest shareholder of IQiyi, is said to have also upped its stake in IQiyi.

Baidu CFO Speaks On The Future Of E-Commerce

Speaking at a conference organized by Fortune magazine, Jennifer Lee, the CFO of Baidu, shed new light on Baidu’s recent moves. Baidu was party to an $800 million deal along with fellow Chinese Internet giant Tencent and mall network operator Dalian Wanda, seeking to dislodge Alibaba from its dominant position in Chinese e-commerce by leveraging Baidu’s competency in search to disrupt the O2O (Online to Offline) model. Currently the online in O2O is dominated by Alibaba, while its brick and mortar partners are the offline element. Baidu seeks to use deep learning, a technology that finds patterns among audio-visual data fed by users to their devices through cameras and smart eye-wear, to help users make purchase decisions. Baidu’s service will inform users about the availability of goods identified through deep learning at their offline merchant partners. It will also guide them, by means of the location-based services of its maps, to the stores to complete the purchase. [8]

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Notes:
  1. Baidu Earnings Page At Businessweek.com []
  2. Baidu Revealed More About Its Smart Bike []
  3. Qihoo Sues Baidu Over Posts Blaming It For IPhone Virus []
  4. China Search Engine Market Share In Q3 2014 []
  5. Why Baidu’s Headed up And Qihoo Isn’t []
  6. XIaomi To Invest $300 Million In IQiyi []
  7. Hollywood Ambitions Of IQiyi Well Funded []
  8. Baidu’s CFO On The Future Of Search []