Where Is Baidu Spending Its Money?
The company is pouring more on AI research
China’s (FXI) (MCHI) Internet search giant Baidu (BIDU) is investing heavily in modernization in order to try to take the lead in key technology fields. All of its efforts are being geared toward driving top and bottom line improvements. Digital content production and AI (artificial intelligence) are just a couple of the projects taking up large chunks of Baidu’s investments.
In 4Q16, the company spent ~$300 million to produce original content for its streaming video service iQiyi. Baidu’s iQiyi is currently more like Alphabet’s (GOOGL) YouTube, though the company is working to make it more like Netflix’s (NFLX) or Amazon’s (AMZN) streaming video services that are available via paid subscription.
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Subscription the way to go for iQiyi
Of the ~480 million registered iQiyi users, only ~20 million are paying for the service. Free users, who make up the majority on iQiyi, help Baidu to generate advertising revenue through the service. However, with competition growing for online marketing revenues, Baidu is keen to steer iQiyi toward a paid subscription model rather than an ad-supported model.
The market for subscription video services is expected to grow to $61.4 billion by 2019 from $25.3 billion in 2014, as shown in the chart above, according to MarketsandMarkets.
O2O and AI are other Baidu cash guzzlers
The other Baidu program consuming a lot of investment is its online-to-offline (or O2O) initiative, by way of which it strives to connect online shoppers with offline merchants.
AI research is also taking up huge chunk of Baidu’s investment. With cutting-edge AI technology, Baidu sees the opportunity to grow its core online advertising business by being able to serve more relevant advertising messages that yield greater returns on investment for marketers.
AI is also crucial to Baidu’s self-driving technology, which is part of the company’s efforts to diversify its revenue streams beyond online advertising.