Baidu Is Building an AI Mousetrap

(Bloomberg Opinion) -- Baidu Inc. spent a good portion of the 20-minute opening presentations of its investor call Wednesday talking up how awesome its artificial-intelligence technology is.

AI as a service has so many fans, it’s so wonderful, it’s industry-leading. Blah, blah, blah. I’m paraphrasing.

CEO Robin Li pointed to the example of a user taking a picture of a flower, and its AI being able to identify the type.

That’s cool.

But can AI cure addiction?

I ask, because Baidu has an advertising problem, with its habit of relying on one revenue stream getting more expensive.

Speaking of addiction, the healthcare sector accounts for around 30 percent of advertising, the company said today, a figure that’s declining as it once again cleans up its ad offerings in that category.

Baidu Is Building an AI Mousetrap

That’s just one of the many reasons why it gave a fourth-quarter revenue forecast that missed estimates. Weakness in real estate, interior design, lifestyle and online commerce were also cited. Though to be fair, Baidu is no longer recognizing revenue from divisions it sold off, which eliminates around 1 billion yuan ($143.5 million) of sales from that quarterly figure.

It doesn’t change the fact that costs are rising. Traffic-acquisition expenses climbed 25 percent in the third quarter, faster than both overall revenue (20 percent) and core revenue from its ad-based business (17.8 percent).

If you consider new accounting methods that Baidu adopted in January, then it’s 27 percent for total revenue and 25 percent for core, which actually looks pretty good. Under those new standards it’s as if every dime of spending to get traffic is matched by a dime of actual sales.

Except that huge swathes of eyeball acquisition are hidden in sales, general and administration expenses, which climbed 51 percent “primarily due to increased investment in channel and promotional marketing.” 

Baidu Is Building an AI Mousetrap

Don’t worry, said CFO Herman Yu, this escalating expenditure is resulting in more time spent on the Baidu app. And besides, the company has sophisticated systems in place to ensure that spending doesn’t get out of hand, he said.

Sweet. So every dime is well spent.

Well, not necessarily. The company is spending big on AI and its own operating system, called Duer. It’s also throwing money around in the belief that users will latch onto the Baidu app, and stay there. You know how Tencent Holdings Ltd. launched WeChat seven years ago, turning it into a one-stop shop for chatting, ride-hailing, payments, news and content? That’s what Baidu is hoping its own app will be.

Tencent just started opening the spigot on advertising in the WeChat feed, which makes it a huge competitor to Baidu.

Meanwhile the DuerOS isn’t quite profitable yet, and may struggle to be next year. If investors can hold on, Baidu expects “meaningful monetization” in 2020.

And of course Baidu’s AI is so awesome that it will do all sorts of great things. Like, deliver better ads. 

Executives couldn’t stop crowing about how its core competence and company DNA make it so good at serving up content that can then be converted into clicks. Advertisers, you see, will be the biggest beneficiaries of this super-hot AI technology.

I guess we shouldn’t be surprised. Baidu already painted itself into a corner when it decided to get out of the online-to-offline business. It was never much into games, and its major content play – iQiyi Inc. – remains a massive money burn.

Which leaves Baidu trying to building a better mousetrap.

Not to worry, it’ll be an AI-powered one.

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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