Baidu’s $3.6bn search for relevance will not bring much Joyy

Taipei — Baidu 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 has decided to buy a ticket to China’s live-streaming party just as the bar starts to die down. This is the type of mentality that drove acquisition sprees in the past by Time Warner and News Corp.

The 2000 AOL-Time Warner 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 is 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 sort 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 chequebook in hand. For $3.6bn in cash, Baidu will buy Joyy’s domestic business, which brought in about $1.8bn in sales last year. Integrating with YY, as it is known, can help Baidu monetise 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 and Tencent, the two other BAT members, have maintained double-digit rates of expansion even through the Covid-19 pandemic.

In reality, though, Baidu is not buying growth. YY is not 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 that Joyy’s management pushed hard overseas, changed its company name from the original “YY”, and spent a lot 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 was not enough, then maybe this statement from CEO 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 pressing on, 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 is not 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 $21bn in cash and short-term investments, and no growth prospects on the horizon, it makes sense to write a few cheques 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 will not end here.

Bloomberg