Baidu Investors Should Fear Google Play (GOOGL, BIDU)

BIDU has a lot to lose with GOOGL's entrance into China with Google Play

Google Play is coming to China … or at least that’s what The Information is saying. Supposedly, Google’s (GOOG, GOOGL) App Store could be in China this fall, and that could have big implications for the app store provider Baidu (BIDU).

GOOGPlayThere are two ways that App Stores make money. First is by the sale of apps, where Google retains roughly 30% of all transactions. Second, app store providers operate their own core apps that lead to higher advertising and gaming revenue. For Google, this includes YouTube, Search, Maps, Gmail, etc.

Kantar Worldpanel figures there are 700 million smartphone and tablet users in China. Google’s Android operating system accounts for nearly 80% of that market! Baidu’s app store runs on Android, as does Google Play.

With that said, BIDU is the current king of mobile in China. During its last quarter, Baidu had 629 million mobile search and 304 million mapping monthly active users (MAUs), respectively. That user base accounted for more than $1.3 billion during the second quarter, or 50% of Baidu’s total revenue.

Thus, mobile is of utmost importance to BIDU and the sustainability of its stock price.

Likewise, mobile is very important to GOOGL, especially in the company’s most lucrative market, the U.S. During the second quarter, Google noted that YouTube mobile viewing more than doubled and that mobile searches now exceed desktop searches in 10 countries.

A Major Risk to the Longevity of BIDU

Baidu is essentially a copycat of Google in China, attempting to offer many of the same services, and even mirroring Google’s appearance on many of those services (i.e., search). However, Google remains one of the most innovating and powerful technology companies in the world, generating nearly $70 billion in annual revenue compared to BIDU’s $9 billion.

Furthermore, much of Baidu’s success is only possible because of the compliance and censorship requirements in China that have prevented GOOGL from penetrating the region. If Google can address these issues, it can leverage its ownership of the Android operating system to its ongoing relationships with all the top smartphone manufacturers in China throughout the world to build market share.

In other words, it has a good shot at getting Google Play on smartphones in China, and if so, BIDU has the most to lose.

As for Google and the implications of getting in China, just look at what happened to Apple (AAPL). During Apple’s last quarter, the company managed to grow revenue 112% year-over-year in the region, with China accounting for 26.6% of total revenue.

I’m not suggesting that Google will be as successful as Apple in China, but I do think the pieces are in place for Google to be disruptive in both mobile and in the Internet as a whole in China.

If so, that could become a major catalyst for the stock, and a full-blown disaster for BIDU.

As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.

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