Baidu sees growth rate slowing in 2011

SHANGHAI/BEIJING: China's top search engine, Baidu Inc, sees its top-line and bottom-line growth rates softening over the next year on a higher base of comparison, as it eyes acquisitions and "contextual" ads to boost growth in the future.

"No ... We have such a bigger base," Haoyu Shen, Baidu's senior vice president of business operations, said at the Reuters China Investment Summit when asked whether the firm can keep up its stellar top and bottom-line growth rates into 2011.

Also read: Google loss in China helped Baidu gain

Baidu said in October its third-quarter net profit more than doubled compared to a year ago, while its revenue almost doubled.

"We had a major re-acceleration this year, and that's due to a few reasons," said Shen, citing the rebound in the Chinese economy, the switchover to its new keyword advertising system and Google's scaling down in China.

"For these reasons, it most likely won't repeat itself next year," he said.

Also read: Google search market share slips as Baidu gains

Baidu shares have soared more than 160 percent this year after the firm's main competitor, Google Inc, said it would shut its China search page after a serious hacking episode and on censorship concerns.

Shen said the "Google effect" -- an increase in traffic resulting from disruption in U.S. company's Chinese operations earlier this year -- boosted Baidu's business by a small amount and is largely over by now. He said Baidu's strong performance so far this year was due to the introduction of its Phoenix Nest keyword advertising system late last year, which was ramped up fully this year.

The system has enabled Baidu, named after an ancient Song dynasty poem, to make money from its clients as well as offer more value added services.

Shen said traffic acquisition costs as a percentage of revenue will come in near 10 to 11 percent for 2010.

He declined to give a forecast for next year.

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Still a search firm

Baidu was the only Asian name in the top 100 holdings of the world's 30 biggest hedge funds in the third quarter of 2010, according to Thomson Reuters' StreetSight. The hedge funds increased their holdings of Baidu by roughly a fifth in the third quarter from the second quarter, the data shows.

Although Baidu has made forays into e-commerce and online video this year, its focus will still be search functions, Shen said.

Baidu has a tie-up with Japanese online retailer Rakuten Inc to operate an online shopping mall, and also formed Qiyi.com, a joint venture offering licensed online video content with Hulu backer Providence Equity.

Shen said both ventures will not contribute meaningfully to Baidu's bottom line in the near term, but will raise ad dollar spending among its major clients, especially for e-commerce.

"It's growing very fast; it's already meaningful. I hear people saying for Google it is 30 to 40 percent of their revenue, but for Baidu it is not that big... eventually it might grow to that level," Shen said.

China is the world's largest Internet market by users at 420 million online. China's search industry, in which Baidu dominates with an 73 percent market share by revenue, was worth 3.13 billion yuan ($470 million) in the third quarter, according to iResearch.

Earlier this month, Baidu invested in TG.com.cn, an e-commerce website for home decorations. At the end of the third quarter, Baidu had 5 billion yuan ($751 million) in cash and equivalents on its balance sheet.

"We are definitely more open-minded than a year ago when we looked at (M&A) opportunities," Shen said at the summit, held at the Reuters office in Beijing.

"It is exciting times now when you look at e-commerce and wireless...With our leading position in search and the resources we have on our books...it makes sense for us to look at these more open-mindedly" he said, adding the focus of acquisitions or investments would be mostly Chinese companies.

Baidu is also eyeing new growth in contextual advertising, which uses a web page's keywords to choose what ad to display on that page. Shen said there will be no big boost for its contextual ads platform in the near term but that the firm was upgrading the system.

"Contextual is relatively small for us, it's much bigger from our understanding for Google globally and China," Shen said.

"The way we think about it, we need another sort of "Phoenix Nest" revolution, because Phoenix Nest is for paid search advertising, but we need a similar thing for contextual and when that happens we will see huge improvement in contextual revenue," he said.