People trapped in their houses by coronavirus are going online instead of going out. Traffic on the main platforms is surging and Baidu, China’s answer to Google, is no exception. More people staying longer on search engines, streaming sites and social networks should be great for internet giants. Or is it?
For sure, traffic acquisition costs, a major expense for internet groups, will fall. These are equivalent to about a quarter of advertising revenues at Google.
But higher traffic does not equate to higher income for search platforms. The contrast is with gaming, where more time playing means surging in-game purchases.
For Baidu, which makes about three-quarters of total revenue from advertising, that is bad news. Even before the outbreak, a slowdown in China had trimmed the advertising budgets of clients. Marketing campaigns have now been cut further. Cancelled events and concerts contribute to the malaise.
Baidu’s biggest clients, which include online gaming companies, real estate developers and plastic surgery clinics, have little incentive to advertise. A surge in new sign-ups for online games means fewer game ads are needed. Demand for homes has plunged and some cities have banned home sales altogether. Plastic surgery clinics, a lucrative source of core ad revenues, are taking a hit. Nose jobs are the last thing on people’s minds.
Some hope may be found in Baidu’s video unit iQiyi, China’s Netflix rival. Last quarter, subscription revenue rose more than a fifth. An increase here would help offset a decline in ads.
Shares down almost a fifth since early January reflect a frosty outlook for Baidu. Even at 16 times forward earnings, at decade lows, the decline is just beginning. Content acquisition costs remain steep. Higher costs may be needed for servers to accommodate increased traffic. Operating expenses have been on a rising trend since 2018.
With the virus spreading to other countries, global internet companies could face similar challenges. Google’s advertising business accounted for more than 83 per cent of Alphabet revenue last year. California is a long way from China, but economic and market shocks are spreading the impact of coronavirus globally.
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