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Baidu Cuts a Strategic Deal with NetEase Music

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Sep. 1 2019, Updated 9:25 a.m. ET

Traffic costs jumped 9.0%

On October 12, Baidu (BIDU) made a strategic investment in NetEase Cloud Music, a unit of NetEase (NTES) and one of the leading streaming music services in China. The investment opens the way for Baidu to become NetEase Cloud Music’s strategic partner. In that position, Baidu plans to work closely with NetEase Cloud Music in areas such as copyright, content, and traffic sharing.

In particular, traffic sharing could become an area of great interest to Baidu. The company generates the bulk of its revenues from advertising sales, a business heavily reliant on traffic flow. As a result, Baidu spends tens of millions of dollars per quarter on traffic acquisition. In the second quarter, its traffic costs rose 9.0% YoY (year-over-year) to $408.0 million. Google’s (GOOGL) traffic costs rose 25.5% YoY in the same period.

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Over 400 million users

NetEase Cloud Music exited 2017 with more than 400.0 million users, meaning that it pulls a significant amount of traffic. NetEase is the controlling shareholder in NetEase Cloud Music. NetEase’s revenues rose 21.7% YoY in the second quarter. NetEase Cloud Music has an agreement with Alibaba’s (BABA) Ali Music, in which the two music services share part of their music libraries in an effort to broaden song selections for their users.

TME preparing to go public

NetEase Cloud Music is competing with Tencent’s (TCEHY) Tencent Music Entertainment (or TME) in China’s on-demand music market. Tencent is in the process of taking TME public through an IPO in the United States. Spotify (SPOT) owns a 9.0% stake in TME.

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