By XIAO Fang
ZHANG Yuan serves as the director of channel marketing for a business service platform. It’s his responsibility to place performance-based ads on Baidu, Toutiao, Tencent, and other platforms to generate sales leads. Last year, Zhang spent less than 2 million RMB ($280,000) on ads in search results and in-feed ads on Baidu. In April, Baidu's sales agent quoted him a new annual contract of 8 million RMB ($1.3 million USD.)
Zhang is outspoken about Baidu. According to him, when you spend seven figures on Toutiao, you can expect someone at the director level to call on you. They will also assign an agency to assist you in placing the ads. Baidu does not provide any of these services, and the conversion rate is nothing worth bragging about. "I told Baidu's sales that the asking price was too high, and they replied that they need to meet dead set targets from their superiors,” Zhang said.
Zhang Yuan has been stalling, because there are many advertising platforms to choose from. With options like Toutiao and Tencent, Baidu's sway over small and medium-sized businesses (SME’s) is no longer as strong as it was in the personal computer era.
LIU Shu, the head of a Baidu five-star agency, felt great pressure from Baidu. If he doesn’t meet their sales targets, he will lose commission. Liu Shu says his company missed the targets in the first two quarters of this year, and there is no hope of catching up in the second half of the year.
His clients are mostly from traditional industries. When he started selling Baidu ads more than ten years ago, Baidu was regarded as a symbol of new media and highly popular. Newspapers and magazines were becoming marginal. Interestingly though, today Liu finds himself in a more and more similar situation as these traditional media.
From Lius’ point of view, his clients' ad placement strategies were very conservative. They are not experts in new media placements. But this year, when Liu Shu met with clients, they immediately asked what their game plan should be on Xiaohongshu, an e-commerce and social media platform; whether they should advertise on it; and how to leverage the website to make money.
Liu Shu found himself baffled.
He had planned to introduce advertising placement strategies on Baidu. Now, he found himself feeling that he was no longer necessary.
Baidu's financial reports also reflect this trend.
In the first quarter of this year, Baidu lost money for the first time in 14 years, with an online sales revenue of 17.7 billion yuan ($2.5 billion,) up just three percent year over year. Its second-quarter revenue was at 26.3 billion yuan ($3.84 billion,) up one percent from a year earlier, according to its second-quarter report on Aug. 20. Net profit attributable to Baidu was 2.4 billion yuan ($338 million,) down 62% from a year earlier. Online sales revenue was 19.2 billion yuan, down 9% year over year.
One Baidu executive told Jiemian News that Baidu executives were aware of the slowdown in revenue growth last year. On top of external factors, the team stuck to old ways of thinking; their understanding of products and service has not kept up with changing times. These are significant problems.
A number of people that have previous interactions with Baidu's advertising arm believe that Baidu's current situation is mainly self-inflicted.
Gone are the days of easy money
In the eyes of insiders, Baidu has indeed been too comfortable for too long.
A former Baidu employee told Jiemian News that in the early days, it took Baidu little effort to make money. Agencies acted as resellers and expanded their client base imprudently but briskly. They would register a Baidu marketing account for a company, then call and invite them to place ads on this platform.
Agents would tell their leads, if you do not market often, others may not find you on Baidu — an argument which small business owners find hard to refuse.
After all, Baidu controls the gate to website traffic in the computer age.
At that time, Baidu felt no need to innovate its products, said a Baidu executive, all it needed to do to increase revenue was to add more advertising space. Its monopoly on online traffic made it the most valuable company in internet industry in China. Ninety-eight percent of its revenue came from ad sales.
But in the mobile era, Baidu has gradually lost its status as a traffic portal. The rise of WeChat, Toutiao, and Douyin in 2014 marked a watershed. The way users acquired and consumed information changed. Users became used to being "fed" information, instead of searching for it.
This has also opened up more options to advertisers.
Meanwhile, Baidu's search products were plateauing after more than ten years of development. Several advertisers we spoke to felt more at ease with the stable and predicable cost of search advertising, compared to in-feed ads that costed however much money had been deposited and lasted for however long the money lasted.
The competitive external environment and Baidu's continuing failure to innovate, coupled with a slowing economy, contributed to the stagnation of Baidu's advertising revenue growth.
The above Baidu executive also pointed out that Baidu's management became determined to bring changes last year. In hindsight, this should have happened sooner.
In the end, Baidu blamed XIANG Hailong, senior vice president of the search business, for its slowing revenue growth and announced his resignation when it released its first-quarter results on May 17th, 2019.
Baidu restructured its search arm into a mobile business unit and appointed SHEN Dou its new Senior Vice President. A series of personnel changes followed: WU Haifeng, Vice President of search business; ZHENG Zibin, Vice President of business innovation; GU Guodong, Vice President of sales resigned. Baidu veteran SHI Youcai came back and to head sales reporting to Shen.
Up until now, changes came in the form of new product launches and a focus on customer service. Baidu has launched its own customer relationship management (CRM) platform Aifanfan, which consolidates CRM software providers and incorporates open source development solutions. In terms of customer service, sales representatives are required to become more customer-oriented and gain better understanding of their clients.
But will advertisers pay for these changes?
More sophisticated advertisers
Zhang Yuan, who has been doing paid online advertising for years, has dramatically changed his strategy this year. The first is search ads. Even now, Baidu search ads are still a must-have option for advertisers, but they are clearly becoming more rationed.
Zhang recalls that in the past couple of years, because the capital flow was good, advertisers had sufficient budget and sometimes were able to outspend their competitors. People would compete for a keyword, raise the price of the original one three to four times, but this year the entire industry is tightening its belt, and advertising budgets haves shrunk steeply.
At the beginning of this year, Zhang Yuan found that the competition had basically stopped their search launches. His strategy shifted to some conventional delivery, so that people in real need could benefit. "Our spending has been very stable in the past few months, and we could not even use up all the money we deposited into the account,” he said.
It is known in the industry that search ads are more targeted and tend to reach those with clear demand for a product or service. In-feed ads, on the other hand, have more exposure and can reach those who knew nothing about the brand advertised. To raise customers' awareness, in-feed ads are necessary. However, because of the wider exposure, money is spent much faster.
Between 2016 and 2017, Toutiao and Baidu launched in-feed ads. Zhang Yuan tried both.
After some experimenting, he felt Baidu fell short of delivering the results he wanted. After running through a 200,000 yuan ($28,000) budget on Baidu, Zhang Yuan immediately hit the pause button. "Poor customer service, and the results were far from satisfactory. There were a lot of false leads with false phone numbers. It was a waste of labor." Zhang said.
Baidu's in-feed advertising revenue, however, has kept up with the growth of Baidu app's daily active user (DAU) number. The key was bundling the sales of search engine ads and in-stream ads. If an advertiser chooses to only place search ads, they do not get any rebate. If one signed an annual contract of 10 million yuan ($1.4 million) with at least 10 percent allocated to in-feed ads, one gets a 20 percent rebate. In some cases, rebates can reach as high as 30 to 40 percent. Advertisers were practically getting the in-feed ads for free and no one says no to freebies.
By Zhang Yuan's estimate, for the industry he is in, it currently costs about 200 yuan ($28) to acquire one effective lead on Baidu. With its competitor Toutiao, the cost is approximately 130 yuan ($19).
Although Baidu App's DAU has maintained rapid growth, reaching 200 million on Aug. 14, its appeal to advertisers is limited.
“We don't care about traffic, we only care about the conversion rate. There is no point showing the advertisement to everyone in China, if we do not end up with a solid sales lead,” Zhang Yuan said.
Another problem that troubles advertisers is not reaching the target demographic. A former Baidu employee told Jiemian News that it was not until 2017 that Baidu began promoting its mobile app. An important strategy was to pre-install the app onto mobile phones. Unbranded phones and small-scale app marketplaces like 2345 were the easiest way to do that. The consumer base of these phones and marketplaces; however, lived primarily in tier four and five cities. This strategy took off quickly, and costs were low, but there was also a downside. The people using Baidu's mobile app were not the demographic advertisers wanted to target.
In June 2017, the number of daily active users of Baidu's information stream exceeded 100 million, according to official data released by Baidu. In November 2017, the Baidu app had been activated more than two billion times.
One person familiar with Baidu's advertising business summed up its strategy bluntly. Advertisers load up their account. When enough users click on their ads, their budget gets spent, and they need to reload their account to get more clicks. Baidu does not have to care who the users and advertisers were, and why they came. The consequence of this vicious cycle is two-fold. Advertisers are not satisfied with the results of the ads, and users complain about false advertising on this platform.
There is another important factor causing low ad conversion rate on Baidu. The Baidu app, content publication platform Baijiahao, and other user products, are separated from Baidu’s business products. Baidu Vice President Shen Shi is in charge of user products, former Baidu vice president Wu Haifeng was in charge of search and commercial products. Information stream advertising is done with the logic of search advertising, and the portrait of users is not accurate. Low conversion rates are inevitable.
In March, Robin Li and his wife MA Dongmin, attended a month meeting together. Both criticized the head of sales, asking him why he did not report that the company’s ad revenue was performing so poorly, according to Caijing, citing people familiar with the matter.
After Xiang Hailong left Baidu, Shen Dou integrated the product and sales teams, and began shifting from a keyword-centric approach towards coordinated use of user profile data points. But it takes time to see if these changes will lead to positive results.
Stranded agencies
In the last two years at tendering conferences, Liu Shu noticed that newcomers showed little interest in becoming a reseller of Baidu ads. They are instead bidding to partner with Baidu's competitors. It is clear that Baidu's reseller agencies are no longer making the kind of money they once did.
In Baidu's sales system, clients are classified into two categories: key accounts and small and medium enterprise (SME) accounts. Key accounts: those who deposit one million yuan ($140,000) or more at a time, are maintained by advertising agencies who also do the actual work of placing ads on behalf of the advertisers. With regional clients, Baidu usually collaborates with agencies that have good local resources and sell through them.
In this system, key clients from important industries, such as education and retail, are usually in the pocket of agencies. Because agencies are better and deeper connected in these industries, they are also tasked with lead generation for the advertising platform.
But it looks like the agencies are fleeing Baidu.
"Baidu partners with 32 agencies, more than half of which have capitalized and diversified their business. The ones that have not been capitalized, like us, are also looking to transform their business models,” said Liu Shu. Business has become more difficult for agencies than it was a few years ago. Some are hanging on to it simply because of the chance of an IPO or a buyout. After all, top agencies can achieve an annual turnover in the billions.
"We won't survive if we don't transform our business,” said Liu Shu.
Jieman News examined financial reports of Shandong CTRL Group, whose major client was the now infamous Putian hospitals. It recorded a a profit of 3.65 million yuan ($520,000) in the first half of 2019, down 85.95% from the year before. For the same period, Beijing WeLink Co., Ltd reported a revenue of 214 million yuan ($30 million,) down 4.38%. Its loss widened 29.86%to 5.61 million yuan ($800,000.)
Under stagnant advertising revenue growth, Baidu shifted some of the pressure to the agencies. Agencies have had trouble maintaining growth since last year, but this did not stop Baidu from raising its sales target by 20% for Liu's company this year.
"Everyone in Baidu's channel sales team is assigned a few agencies, and sales targets are broken down accordingly. There is never room for negotiation, and nobody cares what the current situation is,” he said. "If an agency does not meet its target, Baidu will deduct a certain amount directly from the tens of millions of yuan deposit agencies placed with them,” Liu Shu said. He said that he has communicated with Baidu about the difficulties in the current market, but the other side responded with a message that was basically "take it or leave it,” which Liu sees as arrogance.
Last year, Liu Shu's company was set to earn more than 10 million yuan ($1.4 million) in rebates from Baidu. However, Baidu deducted a fine of a couple million from the rebate for failure to achieve sales targets. In the end, Liu's company made less than 10 million yuan on the resale of Baidu ads. He expects to make even less this year, because Baidu will withhold an even larger sum.
All this is done according to Baidu's policy. It assigns a sales target to its agencies and increases that target year after year. When an agency fails to meet the target, Baidu will charge fines to the agency. Taking all of that into account, an agency gets only three to four percent of the rebate.
What may not be good news for Baidu is that their competitors are approaching their partnered agencies. A number of agencies have shifted their business focus to other news feed products. Liu Shu was also approached by Bytedance with an offer, but he turned it down because of a situation with the company's cash flow. Now, he’s shifting his business focus to public relations.
Since last year, Liu has started offering existing clients public relations services. While ad sales contributed 90% of the company's revenue last year, public relations services brought in 90% of its profit.
Liu Shu said all the drastic personnel changes at Baidu resulted in little improvement for how it treated its agencies.
According to the Baidu senior executive we talked to, internal opinions consider the sales network to be mature, and that is why they are managing it the way they used to.
The executive also claimed that the relationship between Baidu and its agencies is a win-win cooperation. Since it awarded agencies for outperforming their quotas, it is reasonable to fine them for missing targets. He sees the challenges Baidu and its agencies face as the result of a shrinking advertising market. The whole industry is feeling the pain.
The unbreakable ceiling
"Baidu's advertising growth has reached the ceiling, there is not much room for imagination,” said an executive overseeing performance-based advertising business at a top internet firm. He ranked the Chinese internet giants by the size of their ad market: Alibaba, Bytedance, Tencent, and Baidu. Baidu ranked behind its major competitors.
In his view, when advertisers become more sophisticated, advertising platforms are forced to innovate, to make it a more immersive environment for different ads. Of course, the number of users also determines how much revenue an ad platform can generate. Baidu app has grown rapidly, but Baidu has only one star product, there's a limit to how many ads it can display.
In terms of Baidu's performance on mobile products, HE Feng, a former Baidu employee, feels Baidu's long-time dominance in the personal computer era affected how they make sense of a problem. They’re always thinking in terms of traffic instead of user experience. This has caused problems when they design new products and when they enter new markets.
A typical example is when Baidu tried to enter the Brazilian search market in 2013 in an effort to find a new source of revenue. According to He Feng, Baidu stopped developing its search engine for Brazil in 2014 and shifted its focus to all-inclusive programs installed on computers.
Local customers rejected this, and local television channels produced hour-long shows to teach people how to uninstall Baidu's programs. Local business representatives also stopped collaborating with Baidu because they felt Baidu's brand reputation had deteriorated. Last July, local media reported that Baidu had closed its business in Brazil.
Looking at the products Baidu is really promoting, it's also hard to say which one exhibits user-oriented thinking. Advertisers don't just complain about the Baidu app's demographic, they feel its short video platform Haokan has low-quality users as well.
Baidu reported in the first quarter that Haokan reached a daily average user number of 22 million, an increase of 768% from the year prior. But in the second quarter, it no longer published any data on Haokan.
The founder of a top multi-channel network (MCN) company told Jiemian News that he was invited to publish on Baidu, and he tried all the platforms for a while. When he discovered that he earned fewer views across Baidu products than a new account the company operated on Weibo, he gave up trying. A sales representative at an agency said none of their clients were interested in placing in-stream ads on Baidu. Most of their placements are search and in-feed ads.
One insider believes that much of the problem stems from Baidu's company culture best summed up as, “We do not care about the future. We just focus on reporting data indicators. It's a priority to make the data look nice and to try to get a promotion out of it.” He feels this is a mentality shared by junior staff, as well as director-level employees.
As far as product portfolio is concerned, PING Xiaoli, general manager of Baidu App Business Unit, spoke at a press conference on August 8th. She sees Baidu App as Baidu's flagship product. Short video platform, Haokan, has been the dark horse among short video platforms in terms of growth rate. There’s also Baidu Tieba, Wangpan and Baidu Map.
When asked why there weren't more products to compliment Baidu app, she replied that Baidu app represents Baidu's core strategic mission, and Baidu has invested all of its most important resources into it.
Obviously, Baidu lacks the ambition to carve out an empire in other areas. Short video is just one example. The company is still betting its future on the Baidu app.
According to a person familiar with the matter, Baidu believes that the top priority is to attract as many search users to Baidu app as possible, under the assumption that a larger user base will provide an opportunity for increased revenue.
Baidu has not only been driving the increase of new users through pre-installation and paid advertising in app marketplaces; it has also been encouraging users to sign in, so they can get more accurate data points for user profiling.
In the face of the current growth dilemma, Baidu's official message to the outside world is that it is currently in the stage of trading investment for growth, but it still has full confidence in its future performance. It is true that advertising is growing slowly, but Baidu is also exploring new business models, such as “Mini-Programs for Ecommerce.” In addition, Baidu focuses on supporting platforms, like Youzan and Autohome. Although they are showing strong growth of sales, it takes time to build an ecosystem and user routines.
Baidu's senior management has outlined a key internal message. The company is at a crucial moment for survival.
With challenges coming from outside and within, it's hard to tell whether Baidu will be able to withstand the competition. The logic of advertisers and agencies is simple: they will vote with their feet.
(At the request of the interviewees, Zhang Yuan, Liu Shu and He Feng are all aliases.)
