Baidu’s tricky transition to making money on mobile

When Chinese search giant Baidu discussed its third quarter earnings this week, there was one theme that kept coming up: how to close the gap between monetization on PCs and mobile devices.

Baidu brought in $524.6 million in profit and close to $1 billion in revenue last quarter. However, its fourth quarter revenue guidance of $979 million to $1 billion had some investors worried, as it didn’t display much opportunity for sequential growth. Mobile search traffic was up 110 percent compared to Q3 2011, and up 25 percent sequentially.

“As mobile traffic continues to take off, we are investing aggressively to cement our relationship with users. We’re also working hard to close the mobile monetization gap,” CEO Robin Li said during the call, noting that the company was entering into a “period of transition.”

Li noted that Baidu has bulked up an “ever stronger position” in the mobile search market and is making progress in the area of monetization, but he also confessed that its mobile business is coming off a “low base.”

“It will still take customers time to catch up to the shift to mobile,” he said.

At a talk last month, Li revealed that mobile revenue represented less than 10 percent of the company’s business, even though it had more than tripled over the past year. He also said that Baidu is putting 25 percent of its R&D efforts into mobile.

In order to tackle the mobile space, Baidu is enlisting the help of its more than 100,000 developers by offering them “seven weapons” for its Baidu Cloud platform, including a new mobile browser with a competitive HTML5 engine that saw more than 10 million activations in the few weeks since it launched.

The company is also ramping up its newly established Location-Based Services division and is focusing heavily on its Baidu Maps product, which got a revamp in September. Baidu’s LBS efforts are exploding exponentially, jumping up nine-fold year over year.

Li reiterated that the search market’s transition to mobile devices is already “well underway” in China. He expects that transition to last at least “a couple of years” as it works to close the monetization gap. At Baidu, the average cost per click on mobile is lower than on PC.

When asked by an analyst to describe Baidu’s strengths and advantages in the switch to mobile, Li highlighted Baidu’s brand strength. The company has a near 80 percent share of the Chinese search market, and Li believes that mobile users will also look to the Baidu brand for search services.

Of course, China isn’t the only country navigating the transition to mobile, but it is the biggest. It has more than 1 billion mobile subscribers and over 200 million 3G users. As one of the first Chinese companies to report its third quarter earnings, we can expect a lot more talk about the transition to mobile from Baidu’s rivals in coming weeks.

US Internet companies also face their own transition in closing the mobile monetization gap. During Facebook’s quarterly conference call, CEO Mark Zuckerberg highlighted the company’s laser focus on mobile. He expects the company to eventually make more money from mobile devices than desktops. It still has a long way to go, though, as just 14 percent of revenue came from mobile In the third quarter. Facebook currently boasts 604 million mobile users.

For its part, Google expects to hit $8 billion in mobile revenue this year, up $2.5 billion from 2011. When asked how long it would take to close its monetization gap, CEO Larry Page declined to give specifics, but he did say that he’s “not worried” about it.