Google, Baidu Push Online Ads Into Mobile Era
Google ( GOOG ) rules the global Internet search world. But Baidu is China's undisputed emperor of Internet content.
Baidu ( BIDU ) 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 Internet market.
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 ( TRIP ) andDemand Media ( DMD ). Rebounds from others over the past several weeks, includingIACI/Interactive ( IACI ),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 IPOs.
Sales of online ads in the U.S. climbed 22% to a record $31 billion in 2011, says the Interactive Advertising Bureau, a trade group.
Search and display ads continue to account for most of the dollars, with U.S. sales rising 28% last year to $15.3 billion
But ads on mobile devices are growing fast -- up 149% to $1.6 billion.
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 Partners.
"(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 content online.
Google,Yahoo (YHOO),AOL (AOL),Amazon.com (AMZN) and others are also trying to cash in by offering their own original video programming online.
But it won't be easy for them to provide on-demand video programs online, says David Hallerman, principal analyst for eMarketer.
"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 2016.
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 S&P's Kessler.
"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.