As any digital business, Baidu needs a continuous stream of traffic to monetize its pages. In 2017 Baidu managed to lower its Traffic Acquisition Costs as a percentage of its revenues at 11.4%. Primarily driven from its Baidu Union Members, and its iQIYI services. The former allows Baidu to have inexpensive content served by third-parties members. The latter will enable Baidu to have high-quality premium content at a low cost.
It’s easy to oversee the fact that a search engine is a website, and as such, it needs a continuous stream of traffic that can be monetized. As shown for Google traffic acquisition costs (or TAC) this is a critical metric as it reveals the distribution strategy of any digital business. A business model able to monetize at high margins on its traffic becomes sustainable in the long run.
Just like Google has a set of deals worth billions to make sure its search results pages are served across several devices. This also comprises a series of partnerships (think of AdSense) to have inexpensive, yet quality content served on its search results pages. So Baidu has to guarantee a stream of traffic toward its results pages.
How does it do that?
Baidu Traffic Acquisition Strategy Explained
Source: Baidu annual report for 2017
As you can see from its financials, a good chunk of Baidu revenues goes toward traffic acquisition. For instance, in 2017 Baidu spent a billion and a half dollars, which represented over 11% of its revenues to acquire traffic on its search results pages, which could be monetized. If you think this is a massive expense, in reality, this is lower compared to Google traffic acquisition costs:
Baidu Union Members: the main inexpensive content creation channel
A good chunk of Baidu traffic acquisition costs is marketing revenues shared with Baidu Union Members. Indeed, Baidu pays its members, based on pre-arranged agreements, a portion of the marketing revenues generated via its click-through on the members’ properties. Similar to Google AdSense, Baidu serves organic results or a set of results that are not directly monetized on its search results pages.
Instead, those are monetized within a website part of its Union Member program. Once a user click-through a banner placed by Baidu on a member site, it generates revenue which is split between Baidu and the website owner.
In short, as pointed out by Baidu:
Baidu Union consists of a large number of third-party web content, software and mobile application providers. Baidu Union members can display on their properties our customers’ promotional links that match the content of such members’ properties. Some Baidu Union members also embed some of our products and services into their properties. We allow Baidu Union members to provide high-quality and relevant search results to their users without the cost of building and maintaining advanced search capabilities in-house and to monetize their traffic through revenue sharing arrangements with us. We reward Baidu Union members by sharing with these members revenues as a percentage of total revenues recognized by us. Because we have implemented measures to deliver a better user experience and build a safer and more trustworthy platform for users since May 2016, the revenue contributed by Baidu Union members slightly decreased in 2016.
Traf ic Acquisition Costs. Our traffic acquisition costs decreased by 6.9% from RMB10.4 billion in 2016 to RMB9.7 billion (US$1.5 billion) in 2017. Traffic acquisition costs represented 11.4% of total revenues in 2017. A decrease in its traffic acquisition costs was mainly due to the growing contribution of our online marketing services through Baidu Feed and iQIYI services.
iQIYI services: the critical ingredient for high-quality partner-generated content
As pointed out on Baidu report for 2018:
iQIYI is an innovative market-leading online entertainment service in China.
We are at the forefront of the entertainment industry in China. Our corporate DNA combines creative talent with technology, fostering an environment for the continuous innovation and production of blockbuster content. Our platform features highly popular original content, as well as a comprehensive selection of professionally-produced and partner-generated content. Through our curated premium content, we attract a massive user base with tremendous user engagement, and generate significant monetization opportunities.
With sixty million members on February 28, 2018, iQIYI is a large TV video streaming service, comparable to Netflix. Since the success of iQIYI Baidu has been able to lower its traffic acquisition costs substantially. As pointed out by the company:
During 2017, iQIYI featured 42 of the top 50 most popular drama series, variety show and film titles streamed on the internet in China based on each title’s peak monthly active users, according to the iResearch Report.
This high-quality partner generated content is based on a powerful implicit agreement between Baidu and premium content producers. On the one hand, Baidu can get premium content at a relatively low cost. On the other hand, premium content producers can get exposure, distribution of their content and monetization!
How does Baidu monetize its traffic?
Source: Baidu Prospectus
Baidu monetizes its traffic in four main ways:
- membership services
- online advertising
- content distribution
- others (live broadcasting, online games, and IP licensing)
Baidu membership packages provide its members with:
- access to premium content
- certain commercial skipping and other viewing privileges
- a higher community status in the iQIYI Paopao social platform
Baidu generates a small portion of its membership services revenue from on-demand content purchase by its users.
Online advertising services
Advertising services based on brand advertising and an increasing portion in the form of in-feed advertising launched in the fourth quarter of 2016.
Video content licensed from third parties by sub-licensing such content to other third-party internet video streaming platforms, and as consideration receive either cash or the right to distribute on our platform certain licensed content from such platforms. We distribute selected original content titles outside of China and to TV stations in China.
Baidul also generates revenues from various other channels, such as live broadcasting, online games and IP licensing. From online games, Baidu primarily distributes third-party online games and sharing revenues with them.
It also generates revenues from live broadcasting through the sale and consumption of virtual items purchased by viewers of its live broadcasting shows. It also makes revenues from IP licensing by licensing third parties to develop related merchandise based on our IP and by licensing to third parties its famous trademarks for use in their products. Also, Baidu also generates revenues from online literature and e-commerce.
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