How Can Baidu Be Impacted With Its Declining Share In China’s Digital Advertising Market?
Medical advertising regulations in China underwent a change after a recent incident where Baidu (NASDAQ:BIDU) was accused of promoting false medical information. The negative publicity and revised regulations are impacting the company’s market share in the digital advertising segment. A recent report suggests that Baidu’s share in China’s digital ad market is expected to drop to 21% compared to 28% last year. Alibaba is set to gain some of this share and is likely to command nearly 30% of China’s digital ad market. Search services is the most valuable segment for Baidu as per our estimates, accounting for more than 70% of its valuation.
One of the key drivers of this segment is search services revenue per user and we expect this number to increase steadily from around $14 in 2016 to nearly $22 by the end of our forecast period.
However, as Baidu loses market share in the Chinese digital advertising market, the growth in these revenues can slow, impacting the company’s valuation negatively. There can be a nearly 15% decline in our price estimate for Baidu if the search services revenue per user grow gradually and reach around $18 by the end of our forecast period.
After it suffered from significant loss of reputation due to allegations of promoting false medical information, Baidu started working towards a safe and trustworthy online ecosystem. The company is limiting number of advertisements per page and enforcing higher standards for advertisers. However, these measures, along with new regulations prohibiting prescription medication ads, are impacting Baidu’s revenues. A significant portion of Baidu’s revenues came from medical advertisements and post the new regulations, Baidu’s ad revenues are expected to grow just 0.3% in 2016 and the corresponding number for Alibaba is as high as 54%. eMarketer expects the decline in Baidu’s market share to continue< in the next two years and expects this number to reach around 18% in 2018.
While the new Chinese online advertising regulations apply to all players, Baidu appears to be most impacted by these changes. The company is likely to face a challenging environment in the next few years, however as it works towards improving the quality of advertisers on its platform and establishes best practices to regain user confidence, these measures should benefit the company in the long term.
We care deeply about your inputs, and want to ensure our content is increasingly more useful to you. Please let us know what/why you liked or disliked in this article, and importantly alternative analyses you want to see. Drop us a line at content@trefis.com
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap