Verdict Still Out on Baidu’s $1.9 Billion App Store Deal; “Baidu has come to the realization that mobile search doesn’t work the same way that web search does”

Jul 16, 2013

Verdict Still Out on Baidu’s $1.9 Billion App Store Deal

By Paul Mozur and Isabella Steger

Baidu Inc. BIDU +4.04% just pulled off its biggest acquisition ever: forking out $1.9 billion to buy a Chinese app store operator from gaming company NetDragon Websoft Inc. 0777.HK +0.21% But investors in Hong Kong-listed NetDragon certainly didn’t like the deal, with its shares plunging as much as 21% during the day. It might also be awhile before Baidu investors learn the true value of the purchase. Nasdaq-listed Baidu is paying $1.9 billion for 91 Wireless Websoft Ltd., which posted first-quarter revenue of only $20 million. Clearly, what Baidu is after is not cash, but mobile users, who come in droves to 91′s app store HiMarket, one of the most popular in China, and one of an increasingly dwindling number of big nonaligned Chinese mobile assets.Perhaps more than China’s other two Internet giants, Alibaba Group Holding Ltd. andTencent Holdings Ltd. TCEHY +2.33%, Baidu has suffered as more and more people in China switch to smartphones from computers to access the Internet.

“Baidu has come to the realization that mobile search doesn’t work the same way that web search does. It’s seeing an increasing amount of its traffic go mobile, but advertiser interest in mobile search marketing is not very robust,” said Mark Natkin, managing director of tech research firm Marbridge Consulting.

“More than that, they realize they probably need a more diverse product portfolio,” Mr. Natkin said, pointing out that Baidu’s acquisition could help it make more money off of selling applications, and increasingly popular mobile games, to users who it can guide via its search presence to the app store.

People use search engines much less frequently on mobile phones, and though Baidu’s mapping application is popular, China’s Internet users are more thrilled about Tencent’s instant-messaging application WeChat, which the company said in March had 194 million monthly active users in China.

Baidu’s latest acquisition, one of a string it has recently completed, is designed to help it catch up. But investors may be wondering whether Baidu hasn’t waited too long to make a big move in the mobile space. And indeed, just how much that wait added to the price tag of 91 Wireless.

Three Mobile Internet Portals of Baidu is About To Merge

On July 16, Baidu announced the signing of a memorandum of understanding with NetDragon Websoft Inc.. Baidu will invest $ 1.9 billion to acquire the entire issued share capital of 91 Wireless held by NetDragon. Before August 14, 2013, Baidu will first sign to acquire 57.41% of the shares of 91 Wireless held by NetDragon, and it also declared the intention to acquire the remaining shares. Before the last deadline, if other shareholders are willing to sell their holdings of shares, Baidu will sign approximate terms for the acquisition as with NetDragon.

For Baidu, it is time to make the key acquisition to strengthen the layout of mobile Internet. Baidu has two entrances in the mobile Internet: Ba

idu Search App & Baidu Maps App have already owned hundreds of millions of installed capacity. As the user habits have changed, mobile Internet Apps replaced mobile browsers to become the biggest entrance. Baidu changed its name for Baidu Mobile App to Mobile Assistant in the last year, while Baidu began to support the “Application Search”, as well as the “LightApp plan” in the first quarter of this year, which both have shown Baidu’s ambitions for mobile applications market.

Both are entrances, but Baidu abandoned UC, and selected 91

Robin Li has repeatedly stressed his fancy of “distribution capabilities” of Baidu in the mobile Internet, and application distribution is one important direction. Baidu has made great progress on the application distribution. Baidu’s mobile application distribution volume has rose over 50% for three consecutive quarters, and conversion rate of user’s downloading improved for 28% in the first quarter of 2013 against the previous quarter. Probably having tasted the sweetness of application distribution, Li will shoot again to invest $ 1.9 billion to acquire 91 Wireless.

Baidu was once rumored to acquire the UC browser for only $ 1 billion or so. Baidu finally did not choose the mobile browser as an entrance of increasing decline, but chose the application entrance instead that is becoming increasingly important. The decision was backed by Robin Li’s judgments based on the Baidu’s data available: Baidu’s Report: Mobile Internet Trends in Q1 2013 shows that online shopping, video, search, maps and other applications had double-digit growth for use length, but the browser has only increased by 2%. Browser starts per day and calls by external App are gradually declining in the proportion.

In addition to expanding applications market share, Baidu also fancies 91’s resources for platform developers. 91 Wireless has more than 100,000 developers, and Baidu Cloud, which is being promoted by Baidu greatly, is in a high-profile to provide developer-oriented Cloud Application Engine (BAE), cloud storage, cloud LBS, cloud sending and other services.

Again revealed Baidu’s acquisition preference: wholly-owned

Baidu shows a clear intention on the 42.59% of the shares in the hands of other 91 shareholders, which once again confirms that Baidu tends to wholly acquire in investment ideas. Alibaba and other giants take capital injection more, but Baidu is more fond of absolute control. The previous case is incorporating PPS into iQIYI (爱奇艺).

Following the acquisition of PPS, Li is going to complete the second biggest deal this year. Thus, Baidu forms three mobile Internet portals of mobile search + Baidu Map LBS + App distribution. Thus, Baidu’s mobile Internet strategy is completely clear: moving the portal status of PC Internet to the mobile Internet.