Baidu (NASDAQ: BIDU), owner of the best Chinese search engine, has recently suspended certain news channels within its mobile application to “comply with government directives”. He warned that the suspension could reduce his advertising revenue from these channels, but did not specify the exact channels or the actual impact on revenues.
Baidu said it would “carry out maintenance” on the news channels from April 8, and that it would improve its monitoring practices to enhance the “quality and integrity” of its content. He did not say if or when these channels would return, but stressed that the rest of the Baidu application would continue to operate normally.
It is not the first time that Baidu has been criticized by Chinese regulators. Let’s go back to Baidu’s clashes with Chinese censors and how this latest setback could dampen growth in the short term.
A search engine for a totalitarian government
Baidu conquered the Chinese research market after AlphabetGoogle left the country in 2010. It controls 73% of the market today, according to StatCounter. Baidu proactively censors “objectionable” content – including articles in Tiananmen Square or Taiwan – but still draws the attention of regulators on a regular basis.
In 2016, the government forced Baidu to withdraw health care ads following the death of a student who had bought an experimental cancer treatment advertised on the platform. In 2017, the Chinese cyberspace administration imposed “maximum” fines on Baidu, Tencent (OTC: TCEHY), and SINA for allegedly disseminating false information and for not blocking offensive content on their social platforms Tieba, WeChat and Weibo, respectively.
In early 2019, the cyberspace administration temporarily suspended part of Baidu and Sohu.comnews services as part of a six-month campaign to cleanse the Internet of “negative and harmful” content. Therefore, China’s latest crackdown on Baidu appears to be the continuation of these draconian measures, all of which were aimed at tightening the government’s grip on nearly 900 million Internet users.
How could these repressive measures harm Baidu?
Baidu’s revenue growth has slowed in the past year, its main advertising business struggling with China’s economic slowdown, competition from rivals like Tencent and ByteDance and the COVID-19 epidemic in late 2019 and early 2020.
Baidu’s advertising revenue has declined each year for the past three quarters, and it expects to decline further in the current quarter. Baidu is trying to revive this business by developing its mobile application in an ecosystem of mini-programs, which allows users to access games, e-commerce services, deliveries and more without ever leaving the application.
This expansion is widely seen as a response to Tencent’s messaging platform, WeChat, which hosts 1.2 billion monthly active users (MAU) and more than 2 million mini-programs. Last quarter’s daily active users (DAU) on Baidu’s mobile app increased 21% annually to 195 million, while users of its mini programs jumped 114% to 316 million.
Baidu still reaches a smaller mobile audience than WeChat, but it is gradually gaining ground. This growth complements the expansion of its DuerOS virtual assistant on smart speakers and other devices, its Apollo unmanned platform, and AI services – all of which could reduce its long-term dependence on its main search engine. .
But let’s not jump to conclusions … for now
The suspension marks another setback for Baidu, who was also recently hit by allegations of inflated growth figures in its video unit iQiyi (NASDAQ: IQ). It also highlights the ease with which Chinese cyberspace regulators can force companies to remove objectionable content and the intensity of competition between tech giants like Baidu, Tencent and ByteDance.
However, investors should not assume that the cyberspace administration will fine or discipline Baidu. Giant online dating Momo (NASDAQ: MOMO) notably faced a similar ordeal last year, but its services have been fully restored after cleaning its platforms. Therefore, the suspension could simply be a retarder rather than a road rush for Baidu – but investors should always watch the situation for other red flags.