) rules the global Internet search world. But Baidu is China's
undisputed emperor of Internet content.
) has dominated the country's Internet activity since Google
pulled out two years ago, following runs-ins with regulators over
censorship issues. Now Baidu handles roughly 78% of the Web
searches in what is the world's largest and still vastly untapped
Like Google, Baidu's revenue is based on consumers clicking on
text-based ads posted alongside search results.
Those clicks have kept Baidu's year-over-year revenue growth
above 80% for the past four quarters. Profit growth for the same
period ranged from 81% to 106%.
Shares of both Google and Baidu have pulled back after hitting
highs in March. Google corrected 14% through last Thursday. Baidu
was 24% off its high.
The China-based search engine -- named for an ancient poem
about the persistent search for ideals -- suffered partly from a
sales miss and disappointing guidance for Q2. But the company
also faces a rising tide of challenges. Tapping the consumer
shift to mobile devices, increasing competition and China's
stumbling economy are all on the front burner. In addition, Baidu
is now itself battling regulators over censorship issues.
But investors may have over-reacted, says Scott Kessler, an
equity research analyst for S&P Capital IQ. "Baidu has gotten
hammered for the last couple of months," he said, "but we think
that it is still a very, very strong organic growth story that is
being underappreciated by the market."
Despite the pullback among its leaders, the Internet-Content
group climbed into the top 20 this month among 197 industries
tracked by IBD, up from No. 162 at the start of March.
Most of the advance owed to gains from stocks likeTripAdvisor
) andDemand Media (
). Rebounds from others over the past several weeks,
),LinkedIn (LNKD) andFacebook (FB), have also helped.
Search companies such as Google andYandex (YNDX) get most of
their revenue from ads. Some, likeAncestry.com (ACOM), a family
history research firm for consumers, and online recruiting
serviceDice Holdings (DHX) collect revenue for services. Others
have multiple revenue streams, including ads.
The group has a high percentage of young blood. Eight
companies in the sector, including online travel info provider
TripAdvisor, launched public offerings in 2011. This year,
Facebook, the Web's top social media site andYelp (YELP), a
social media and review service, launched heavily publicized
Sales of online ads in the U.S. climbed 22% to a record $31
billion in 2011, says the Interactive Advertising Bureau, a trade
Search and display ads continue to account for most of the
dollars, with U.S. sales rising 28% last year to $15.3
But ads on mobile devices are growing fast -- up 149% to $1.6
The jump isn't all that surprising, Kessler says.
"You are seeing the related volumes increase because more and
more people are on mobile devices," he said.
By 2015, online ad sales in the U.S. will reach $53.1 billion
and global ad sales will top $132 billion, says eMarketer.
Although the numbers are huge, advertisers only pay when
somebody clicks on their ad. They pay less when ads generate
little interest. That makes online advertising increasingly
attractive, says Martin Pyykkonen, an analyst for Wedge
"(Advertisers) are very comfortable with Internet search
because (they) want to know, 'How do we measure our payback from
this,'" he said.
Venture Capital Cools
By 2016, the number of Internet users in the U.S. will top
289.8 million, up 12% vs. last year, says eMarketer. Global users
will surge 44%, to more than 2.88 billion.
But there are challenges within those estimates.
Privacy is one hurdle. Internet content providers thrive on
detailed knowledge of their users. This allows them to better
target ads and increase revenue. But rising government regulation
such as 'Do Not Track' legislation could make consumers more wary
and hamper revenue growth, Kessler says.
If Internet users become more worried, they could withdraw
from sites and reduce their earning power, he said.
Venture capital funds may also be turning more cautious about
the sector. In Q1, funding to search engine and search software
companies totaled only $16.7 million. That was down 73% from the
same period last year. Similarly, VCs spent $96.3 million on
Internet recreation and entertainment companies such as social
media and Web portals in Q1 vs. $206.7 million in the year-ago
quarter, says a study by PricewaterhouseCoopers and the National
Venture Capital Association.
As a result, performance of the industry's IPOs has been
spotty. And private funding is likely on hold for the foreseeable
future, says Tracy Lefteroff, global managing partner of the
venture capital practice for PricewaterhouseCoopers.
"A lot of the VCs are waiting to see what happens," he said.
"After getting burned in 2000, I think some of these guys are
getting a little concerned now that (the market) may be a little
bit overdone again."
Google has revamped its core search business. It's also
refocusing efforts to reach small and medium-sized advertisers
while launching a plan to charge retailers that reside on its
online comparison shopping service.
Baidu is working on an Internet browser and bringing its
service to mobile devices. In May the company debuted its first
smart phone device, and is rumored to be near a deal for
installing its search service on Apple iPhones in China.
Google, Baidu and Facebook are leading the charge to find ways
to monetize their services with ads on mobile devices. In
October, Google said its mobile ad program was on a $2.5 billion
annual revenue run rate. This year, its ads on mobile devices
could swell to $5.8 billion, according to a January report from
Jim Friedland, analyst with Cowen & Co.
Video content is another key battleground. Revenue from online
video ads in the U.S. is expected to reach $3.12 billion this
year and climb to $4.56 billion next year, says eMarketer.
So far most of that is going to TV networks that post their
Google,Yahoo (YHOO),AOL (AOL),Amazon.com (AMZN) and others are
also trying to cash in by offering their own original video
But it won't be easy for them to provide on-demand video
programs online, says David Hallerman, principal analyst for
"There hasn't been any breakout hit (online) which is why most
of the video ad dollars are still going to TV content posted
online. However there is no reason why one of these large
Internet companies can't produce entertainment content that will
draw an audience," he said.
Online ads continue to hold an edge over more traditional
forms such as print and TV, says Wedge Partners' Pyykkonen.
"Digital marketing largely has appeal because you can target
very specifically and you can get instant feedback on how your
campaigns are faring," he said. Internet companies are trying to
apply the same to mobile devices.
Sales of mobile ads in the U.S. are expected to grow 80% this
year, to $2.61 billion, says eMarketer, and hit $10.83 billion by
Facebook recently admitted the company needs a mobile ad
program to keep up with its users who visit the site on mobile
devices. Google and Yahoo are also on the hunt, seeking ways to
present ads on tiny mobile devices without upsetting users, says
"Mobile by far is an opportunity these companies are focused
on and if someone can figure it out there is a potential
benefit," he said.
But mobile ads on social media sites could also be a hard sell
for consumers, says eMarketer's Hallerman.
"Most advertising is all about 'look at me' and that doesn't
work well on social sites when someone is trying to communicate
among their peers," he said.