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PUBLISHED : Monday, 26 November, 2012, 9:49am
UPDATED : Monday, 26 November, 2012, 1:18pm

Worried Baidu invokes 'Wolf Spirit'

BIO

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young’s China Business Blog (www.youngchinabiz.com), commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, “The Party Line: How the Media Dictates Public Opinion in Modern China.”
 

An internal company memo penned by Robin Li, one of China's richest men and founder of Baidu (Nasdaq: BIDU), has been buzzing through the domestic media, which are interpreting the message as the sign of a looming crisis at the nation's leading search engine. The theme of the memo revolves around the concept of the "Wolf Spirit", which Li says has been lost at his company that pioneered the online search market in China. In place of that spirit, Baidu has become a more complacent panda-like creature that simply enjoys its easy domination of the search space and the billions of dollars in advertising revenue it reaps each year from the business.

It's interesting that Li is just now writing openly about this crisis, since I've been writing about it for quite some time. In a nutshell, Baidu stands in a very precarious position due to the near monopoly it has held for years in the online search space for years, combined with its inability to create new products to diversify its business.

Media are conjuring up images of other previous industry giants that failed to innovate, including Motorola and Nokia (Finland: NOK1V), which once ruled the mobile phone space but have faded due to their failure to recognize the latest industry trends. Perhaps the best analogy for Baidu would be Yahoo (Nasdaq: YHOO), which was the true pioneer in making online search a cornerstone of today's Internet culture.

Yahoo's name was synonymous with the concept of search in the early days of the Internet, allowing it to reap big profits from a business it once dominated. We all know what happened next, namely that Google (Nasdaq: GOOG) not only invented a better search product, but was also more successful at developing supporting products like email and mapping services to support its core business. Meantime, Yahoo has languished under a series of uninspired chief executives, and is now largely a bit player in the global search market.

So the question is: Will Baidu follow down the same path as Yahoo? Li's memo seems to reflect that he is clearly worried about that possibility and wants to instill a sense of urgency and pioneering spirit back into his complacent staff. That complacency has created a cash rich company that has shown an ability to develop expensive but poorly conceived new products that ultimately flop. But no one seems to care too much about this steady stream of failures, since they know the company's lucrative core search business will keep paying their salaries.

The only problem is that nothing ever stays the same, and new competitors are constantly looking for ways to challenge Baidu's search space dominance. In particular, an innovative new search product from Qihoo 360 (NYSE: QIHU) that is rapidly gaining market share may look worrisome to Li. What's more, Baidu has posted some of its slowest ever revenue growth in recent quarters, due in part to China's slowing ad market but also in the absence of alternative products to offset some of the slowing. 

Li also can't like the fact that investors are abandoning his stock, which has lost more than a third of its value in the last 8 months, significantly diminishing the value of his own personal fortune. All that said, perhaps it's good that Li is finally waking up to the fact that his empire may be past its peak and is need of a return to its earlier pioneering spirit. But there's also the very real possibility it may be too late, and Li's call to action could simply mark the start of the company's longer decline.

Bottom line: Robin Li is trying to rekindle the pioneering spirit at leading search engine Baidu, but it may already be too late to combat the complacency that has settled in at the company.
 

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