This $3.6 Billion Search for Relevance Won’t Bring Much Joyy

(Bloomberg Opinion) -- Baidu Inc. looks desperate for love. Once a revered member of the BAT triumvirate, the search engine provider has looked for a variety of ways to juice growth. Now it’s decided to buy a ticket to China’s live-streaming party just as the bar starts to die down. 

This is the kind of mentality that drove acquisition sprees in the past by Time Warner and News Corp. The 2000 AOL-Time Warner Inc. merger is now considered among the worst in history, coming right before the dot-com bubble burst. And recall that Myspace was supposed to make News Corp. hip among the kids, but ended up being sold for pennies on the dollar.

Now, it’s Baidu’s turn. Often lazily likened to Google, the company, under founder and CEO Robin Li has tried to add artificial intelligence and autonomous driving to its offerings, but they have failed to show the kind of boost to revenue commensurate with these hot new sectors of the Chinese economy. Today, it’s a company with plenty of cash, but not much momentum — a combination that sees it chasing relevance with a fat checkbook in hand.

For $3.6 billion in cash, Baidu will buy Joyy Inc.’s domestic business, which brought in around $1.8 billion in sales last year. Integrating with YY, as it’s known, can help Baidu monetize its user base, the company says. On the surface, this seems smart — the Baidu App has more than 540 million monthly active users, which sounds impressive except when you remember that the country has double that many people on the internet.

Yet growth is what Baidu really needs. Revenue widened less than 1% in the September quarter, and dropped in three of the last five quarters. By contrast, Alibaba Group Holding Ltd. and Tencent Holdings Ltd., the two other BAT members, have maintained double-digit rates of expansion even through the Covid-19 pandemic.

In reality, though, Baidu isn’t buying growth. YY isn’t some fresh young upstart that offers abundant opportunities and renewed vitality. Baidu is getting Joyy’s has-been business. In fact, sales dropped 6.1% in the September quarter, the third straight decline.

Joyy could see this coming more than a year ago and took steps to avoid any slowdown. Once the major source of revenue, the domestic-focused YY unit was overtaken this year by its overseas division, called Bigo. That business itself was acquired in March 2019 to drive international expansion.

So the fact that Joyy’s management pushed hard overseas, changed its company name from the original “YY,” and spent a significant amount of time in investor presentations talking up the Bigo unit should have served as a hint about where it sees the future of the domestic business. If that wasn’t enough, then maybe this statement from Chief Executive Officer David Li in August should have done the trick: “We believe Bigo Live has the potential to generate four times as much revenue as YY Live over the next few years.”

Baidu is plowing ahead anyway, despite minimal experience in live-streaming and unimpressive results in recorded video. Management’s thinking is that the purchase will give it “immediate operational experience and know-how for large-scale video-based social media development.” It also hopes be able to leverage its own user base to help YY’s business.

The warning signs are there. Baidu’s core app has only 206 million daily active users. When fewer than 40% of your customers even bother to open the app each day, then you should know that your product isn’t particularly relevant. That makes it hard to drive them to a new product when they barely bother with the existing one, especially when that addition is already on the decline.

With more than $21 billion in cash and short-term investments, and no growth prospects on the horizon, it makes sense to write a few checks and see what might happen. But this deal is two years too late. Baidu should now be looking at software as a service, Internet-of-Things plays, and industrial internet offerings. That means the search for relevance won’t end here. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

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