Baidu’s Acting Like a Startup, But Not in a Good Way

(Bloomberg Opinion) -- Oh come on, Baidu Inc., you're an adult now.

As a 19-year old Chinese internet giant, the U.S.-listed company is acting more like an adolescent startup than a responsible member of the corporate community. Just look at its earnings.

Fourth-quarter revenue climbed 22 percent, which is respectable though not stellar. But how it got there has all the hallmarks of a young company that's burning VC money: Operating profit plunged 77 percent.

Content costs climbed 96 percent from a year earlier as the company pushed its iQiyi video service and the Baidu feeds content network. Some of that could be justified by the fact that other revenue, which includes iQiyi, climbed 104 percent.

Yet if you look at iQiyi Inc. specifically, revenue climbed 46 percent while operating costs escalated by 83 percent.

Back in April, iQiyi CEO Yu Gong said that content costs would moderate and the era of irrational investments would soon be over. Well, iQiyi, and by extension Baidu, are still stuck in that era.

Content isn't the only cost that's spiraling. The increase in bandwidth spending – which is spread between video, feed and cloud – outpaced corporate revenue growth. As did traffic acquisition costs. Both are signs not of a mature company enjoying economies of scale, but an upstart spending beyond its means to drive sales.

A real concern is sales, general and administrative expenses, which expanded 64 percent “primarily due to increased investment in channel and promotional marketing, as well as in personnel related expenses.”

I've beaten my drum before about marketing outpacing revenue in China's tech sector, and Baidu's fourth-quarter numbers bear this out. Core revenue climbed 7.4 percent  while operating costs climbed 23 percent. The conclusion is that Baidu has to work harder for every dime in sales. For example, the company added more online marketing customers but average revenue for each fell 4 percent.

Investors already know that Baidu's ad-based business model is an addiction it needs to break. Management also must decide when to halt this excessive spending so it can focus on margins and profitability.

Since Jan.1, 2018, China reclassified VAT from cost of revenue to net against revenue, which results in a discrepancy between reported numbers and comparatives. Baidu reported 14 percent growth in revenue.

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net

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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