baidu-business-model

The Google of China: Baidu Business Model In A Nutshell

Baidu makes money primarily via online marketing services (advertising). In fact, in 2017 Baidu made about $11.24 in online marketing services and a remaining almost $1.8 billion through other sources. According to Statista, Baidu has an overall search market share of 73.8% of the Chinese market. Other sources of revenues comprise membership services of iQIYI (an innovative market-leading online entertainment service provider in China) and financial services.

The tech market in China has grown exponentially in the last decade. In fact, of the 20 world’s largest tech companies China has nine of them. Companies like Alibaba reached hundreds of billion dollars in market capitalization. As Google shut down its search engine back in 2010 due to the Chinese Government censorship that opened up a huge hole that allowed Baidu to build up the most successful search engine in the country. Baidu in a way tried to replicate (with a certain amount of success) Google. Both concerning search and in terms of business model. A few know that Baidu founder was the first one to put together a link based search engine. Google in 2018 is entering the Chinese search market again.

Baidu Core business is search. However, it also operates on the broader internet market space. That implies a list of competitors like Tencent, Alibaba, Sohu, Qihoo 360, ByteDance, Xiaomi, and iFly Technology.

Baidu origin story

According to Statista as of July 2018, the Chinese search market share is pretty skewed toward Baidu:

market-share-search-china

In 2010 the shut down of Google allowed Baidu to take over the whole Chinese market. Robin Li, now one of the wealthiest people in China, launched Baidu in 2000 together with Eric Xu.

Back in 1996, Robin Li built RankDex was the first search engine that used hyperlinks to measure the quality of websites it was indexing. In 1998 RankDex was acquired by a Dow Jones subsidiary Tradeline.com. Even before Google’s Larry Page had built the algorithm that would make Google the most popular search engine on earth, PageRank.

Yet in 2000 after gathering financing from an early stage venture capital firm (Integrity Partners), the company launched in China. Today Baidu has most of China’s search market share.

How does Baidu make money?

baidu-revenues-2017

Baidu makes money in two ways:

  • Online marketing services, about $11.24 billion in 2017
  • And other revenues around $1.8 billion

As pointed out on Baidu annual report for 2017:

We generate substantially all of our revenues from online marketing services, a substantial majority of which are derived from our pay-for-performance, or P4P, services. Our online marketing customers will not continue to do business with us if their investment does not generate sales leads and ultimately consumers, or if we do not deliver their web pages in an appropriate and effective manner. Our P4P customers may choose to discontinue their business with us, which are not subject to fixed-term contracts. In addition, third parties may develop and use certain technologies to block the display of our customers’ advertisements and other marketing products on our Baidu platform, which may in turn cause us to lose customers and adversely affect our results of operations. Furthermore, as our auction-based P4P services enable our customers to bid for priority placement of their paid sponsored links, we may lose customers if they find the bidding mechanism not cost effective or otherwise not attractive. Additionally, if our users do not increase their search frequencies on our platform, or our content ecosystem fails to offer rich and quality content that meets users’ tastes and preferences, or our users spend more time with or otherwise satisfy their search demands on competing platforms, or we otherwise experience user traffic decline due to any reason, it would be difficult for us to attract new customers or retain existing customers. Failure to retain our existing customers or attract new customers for our online marketing services could seriously harm our business, results of operations and growth prospects.

When it comes to the other revenues sources:

Other revenues increased by 93.6% from RMB6.0 billion in 2016 to RMB11.7 billion (US$1.8 billion) in 2017, which was mainly due to the growth of membership services of iQIYI and financial services.

baidu-revenues-by-segment-2017

In terms of business segments, Baidu can be divided into:

  • Baidu Core: mainly by providing keyword-based marketing services, which target and are triggered by internet users’ search queries, including primarily P4P services, other online marketing services, and artificial intelligence-enabled new business initiatives. 
  • iQIYI: that is an innovative market-leading online entertainment service provider in China. iQIYI’s platform features highly popular original content (think of it as the Chinese YouTube)

What are the main challenges for Baidu?

As pointed out in their annual report, Baidu main challenges can be pointed to nine main ones:

  • general economic conditions in China and economic conditions specific to the internet, internet search and online marketing industries;

  • our ability to continue to attract users to our platform despite the emergence of mobile apps and other services;

  • our ability to attract additional customers and increase spending per customer;

  • the announcement or introduction of new or enhanced products and services by us or our competitors;

  • the amount and timing of operating costs and capital expenditures related to the maintenance and expansion of our businesses, operations and infrastructure;

  • the results of our acquisitions of, or investments in, other businesses or assets;

  • PRC regulations or government actions pertaining to activities on the internet, including various forms of entertainment, online payment and activities otherwise affecting our online marketing customers, and those relating to the products and services we provide;

  • unforeseen events, such as negative publicity arising from widespread media coverage and other sources and labor disputes; and

  • geopolitical events, natural disasters or epidemics.

What are the Baidu business segments?

As we’ve seen the main segments are: 

  • Baidu Core
  • and iQIYI

Baidu.com is the largest website in China and the fourth largest website globally, as measured by average daily visitors and page views according to Alexa.com, an internet analytics firm. Also, “Baidu” was ranked as the fifth of the highest ranking brands in China in BrandZ Top 100 Most Valuable Chinese Brands 2017, a study published by Millward Brown Optimor, a brand strategy research company.

baidu-fifth-most-popular-brand-in-china-2017

The operations are primarily in China. Revenues generated from the operations in China accounted for approximately 97.8% in 2017.

Who are Baidu key partners?

The key partners can be pointed to four main categories:

  • users
  • customers
  • Customers for iQIYI
  • Baidu union members
  • Content providers

Users: Baidu enables users to be connected to relevant information online, including web pages, news, images, documents, multimedia files, and services, through links. Baidu claims to use AI to enhance user experience and deepen user engagement.

Customers: Baidu delivers online marketing services to a diverse customer base operating in a variety of industries. In 2017, Baidu had approximately 775,000 active online marketing customers. The online marketing customers consist of SMEs, large domestic businesses and multinational companies. Baidu has customers located throughout China. Yet it has a more active and larger customer base in the coastal regions, following the current general economic demographics in China.

Customers for iQIYI: they primarily consist of advertisers, who are counted as part of online marketing customers, and membership subscribers of online video contents.

Customers are reached via direct sales force as well as a network of third-party distributors across China. Distributors help Baidu identify potential SME customers, collect payments and assist SMEs in setting up accounts about online marketing services. Mobile revenues accounted for 73.1% of total revenues in 2017.

Baidu Union Members: Baidu Union consists of a large number of third-party web content, software and mobile app providers. Baidu Union members can display on their properties customers’ promotional links that match the content of such members’ properties. Some Baidu Union members also embed some of the products and services onto their properties. 

Content Providers: content providers mainly consist of video copyright holders, apps owners who list their apps on Baidu app store for users to download, users who contribute their copyrighted content to Baidu products, and publishers, who share their content through Baijiahao accounts 

What are Baidu core products?

The core Baidu products comprise:

  • Baidu Post Bar: a social media platform that attracts users through topics of common interest
  • Haokan Videos: an online short-form video aggregation platform
  • Baidu Knows: a knowledge sharing platform built through interactive questions and answers among Baidu users
  • Baidu Encyclopedia: an evolving encyclopedia compiled by registered users
  • Baidu Education: an online platform of educational resources, whose products include Baidu WenKu, Baidu Yuedu, and Baidu Classroom
  • Baidu Mobile Assistant: a mobile app marketplace designed for Android mobile devices.
  • Baidu Mobile Guardian: a comprehensive phone security software, using mobile anti-virus technology
  • DuerOS: a conversational AI platform that enables hardware devices to hear, understand and fulfill the users’ needs through voice activation
  • Baidu Wallet: Baidu Wallet, formerly branded as BaiduPay, provides online and mobile payment services and enables Baidu users to complete a closed loop transaction
  • Baidu Consumer Credit: it mainly provides installment payment services to consumers and services tens of millions of users through education loans and consumer financing to meet consumers’ cash expenditure needs
  • Baidu Wealth Management: it provides wealth management services by leveraging big data and technology
  • Baidu Maps: it provides services relating to locations and intelligent routing and navigation
  • Baidu Cloud Drive: formerly named Baidu Netdisk, is a personal cloud service platform

Baidu services comprise

Online marketing services based on search queries:

Based on two things:

  • P4P: An auction-based P4P services enable customers to bid for priority placement of their paid sponsored links
  • BrandZone: a branded display marketing product which allows the brand image of an advertiser to be prominently displayed on the search result page and in vertical search products in a structured and uniform manner

Online marketing services through Baidu Feed can help customers precisely target the right feed users based on user data on the Baidu platform.

Online marketing services based on contextual, audience attributes, media, and placement attributes refer to the programmatic marketing service transaction system, which includes supply-side platform (SSP), demand-side platform (DSP), Baidu exchange service platform (BES), and data management platform (DMP).
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Multiple payment methods including cost per time:

  • cost per time (CPT),
  • cost per mille (CPM),
  • cost per click (CPC)
  • and cost per action (CPA)

Several systems manage this infrastructure:

  • SSP covers media resources of Baidu and third-party Baidu Union members.
  • SSP intelligently manages media advertising space inventory and optimizes marketing spending by analyzing matching content, target audience and characteristics of different media and platforms.
  • DSP is an integrated sales service platform for advertisers and advertising agents, providing programmatic media purchase service.
  • BES is a traffic transaction platform that combines DSP with media resources, by leveraging the traffic advantage and big data capabilities of BES.
  • DMP integrates data from advertisers, Baidu, and third-party data management platforms, which cover searches, offline visits, target audience tags, sequential placements, and crowd portraits, in order to improve the effectiveness and accuracy of DSP.

Baidu Cloud services

Baidu Cloud is a public cloud computing platform that offers four main kinds of services:

  • IaaS (Infrastructure as a Service),
  • PaaS (Platform as a Service),
  • SaaS (Software as a Service)
  • and AI2B (AI as a service) to enterprise customers and developers to build, test and deploy apps Baidu cloud infrastructure.

Baidu Cloud is based on the same cloud computing technology that supports Baidu internal functions.

Autonomous Driving

Autonomous driving is an important area for future growth for Baidu.

iQIYI (the Chinese YouTube)

iQIYI is an innovative market-leading online entertainment service provider in China. Since 2013 Baidu has been investing in iQIYI. In 2017 Baidu invested 1.5 billion dollars in the company. 

Who are Baidu’s main competitors? 

  • U.S.-based Internet Search Providers (google)
  • China-based Internet Companies (Alibaba, Tencent, Sohu, Qihoo)
  • Other advertising media (newspapers, yellow pages, magazines, billboards)
  • For iQIYI, our primary competitors include companies that operate online video websites in China, such as Youku-Tudou and Tencent Video

How does Baidu work?

baidu-featured-snippet

Baidu search engine is as powerful as Google. I run an experiment to see whether Baidu supported some advanced features (like Google’s featured snippets). In the example above I run the query “what is a Knowledge Graph,” and Baidu gave a direct, relevant answer to my question!

That is not surprising, considering Baidu’s founder, Robert Li built RankDex (a link-based search algorithm) even before Larry Page had built PageRank. What’s surprising though is the level of sophistication and advancement Baidu was able to keep up with.

Baidu search algorithm is based on six central foundational systems:

Link Analysis

Link analysis is a technique that determines the importance of a web page by evaluating the combination of the anchor texts and the number of web pages linked to that web page. The first link analysis system was created by Baidu founder with RankDex, before Larry Page’s PageRank.

Ranking system

Baidu compares search queries with the content of web pages to help determine relevance. One example is the proximity of individual search terms to each other on a given web page and prioritizes results where the search terms are near each other.

Information Extraction

Baidu extracts information from a web page using high-performance algorithms and information extraction techniques. The aim of these techniques points to:

  • understand web page content,
  • delete extraneous data,
  • build link structures,
  • identify duplicate and junk pages
  • and decide whether to include or exclude a web page based on its quality

Web Crawling 

Baidu powerful computer clusters and intelligent scheduling algorithms allow it to crawl web pages efficiently.

Natural Language Processing

Based on linguistics knowledge, big data and knowledge graphs, Baidu natural language processing accumulates and integrates linguistics analysis, such as lexical, syntax and semantic analysis, with calculation, learning mechanisms, and other natural language processing technologies. As Google integrated algorithms, such as Hummingbird and its component RankBrain, with the aim of ranking web pages based on meaning, so Baidu uses similar approaches to understand the relevance of web pages.

MIP (Mobile Instant Pages)

That is a set of open technical standards applying to mobile web pages, which accelerates the loading of mobile web pages. Google has used a similar approach with AMP (accelerated mobile pages).

Summary and conclusions

At first sight, Baidu seems the Chinese clone of Google. That is true not only from its search algorithm standpoint (driven by NLP and a similar approach to link analysis) but also in terms of business models. Like Google has been investing in video content with YouTube, s Baidu has been investing since 2013 in iQIYI. Like Google, Baidu believes that one of the most promising future ventures will be about self-driving cars.

Also, when we look at revenue sources, 86% of Baidu revenues came from advertising, just like 86% of Google revenues came from advertising in 2017. Baidu also invested in its cloud infrastructure, and it is making money by having members of iQIYI (the Chinese equivalent of YouTube) pay for a subscription fee.

When it 2010 Google shut down its China operation that represented a considerable opportunity for Baidu, which has become over the years the most popular site in China and among the most valuable Chinese brands. While it seems the exact copy of Google in China, it is also true that Baidu’s founder created a link-based system before Larry Page. Thus, Baidu might be as an innovative company as Google is worldwide.

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Published by

Gennaro Cuofano

Creator of FourWeekMBA.com | Head of Business Development at WordLift.io | International MBA

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