Baidu Inc.'s position amidst China's elite internet triumvirate is on shaky ground as the firm battles slows its sales growth with regulatory uncertainty and an ongoing cash burn from diversification.
The company enjoys a near monopoly on China's internet search business after tech giant, Google exited back in 2010. But the business platform is decreasing with its efforts to diversify away from search not yielding returns. The company's search generates over 90 percent of Baidu's revenues.
According to Epoch Times, the second-quarter sales increased by 10 percent and profits dropped by 36 percent year over year, this is the biggest quarterly decline in the company's 11 year history as a publicly traded entity.
Shares of the U.S. listed ADR have are down around 6 percent year-to-date. Other members of the "BAT", China's big three internet giants of Baidu, Tencent Holdings and Alibaba have dwarfed Baidu's market capitalization.
Baidu derives majority of its sales from search advertising, putting the firm at mercy of the Chinese Communist Party, an organization that maintains tight regulations over the country's Internet search framework. The firm has found itself increasingly marginalized by its regulatory changes.
Recently, Beijing announced guidance that required online advertising companies to control the number of advertising to not more than 30 percent of each page.
Regulatory rules were implemented after an investigation of Baidu earlier this year, a college student had died from a cancer treatment advertised online. The student found treatment via Baidu's search engine. Following the incident, additional limitations were placed over online advertising of healthcare services.
As a result of the constraints, Baidu has experienced a damper on its advertising revenue growth. CEO Robin Li said the company has experienced a reduced number of online clients, CNBC reported.
Such unfavorable rule environment has dampened some analysts' expectations of the companys' stock. Alex Yao of JP Morgan holds an "underweight" rating on Baidu shares-a minority as a number of analysts polled last week by S&P Market Intelligence. Other analysts, such as those from Piper Jaffray and Oppenheimer, lowered their price targets over the last month, this reflected a downward shift in sentiment.
A large part of JP Morgan's downward assessment of Baidu is as a result of the industry change of advertising dollars away from search engine into social media channels.
Tencent, China's social media and mobile gaming king, is eating Baidu's lunch in online advertising. Tencents' surging advertising revenue growth has reflected the paradigm shift in online advertising.
The company's' second quarter data outlined a 60 percent increase in its online advertising incomes to record 6.5 billion yuan (about $1 billion).
Part of that is due to customers' shift from computers to mobile, benefiting Tencent's mobile platform Weixin/WeChat, which counts 800 million users. Tencent has leveraged the mobile platform Weixin/WeChat to distribute video content such as Hollywood movies, NBA basketball games and mobile games.
The company has historically made most of its mobile revenues from in-game purchases.
In a move to win the grounds Baidu and American computer graphics media company Nvidia Corp. announced they were collaborating on a platform for semi-autonomous cars.
Baidu is also releasing its toolkit to attract AI talent, this follows the footsteps of Microsoft and Amazon. The move aims at helping shape the development of a nascent field that could underpin future consumer-based technology.
Baidu is hopeful that its tools will catch on. Xu Wei, head of PaddlePaddle development at Baidu, said that its AI platform requires only a quarter of the code necessary compared to rival platforms for the same machine translation software, The Verge reported.
Here is a video of Baidu CEO when he was summoned over the student's death: