Baidu: Now a Solid Buy Candidate

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This week has seen the Chinese search engine superpower Baidu (BIDU) launch its very own cloud storage service: Baidu Wangpan. The service, which isn't unlike the popular iCloud by Apple (AAPL) allows each Internet user to store up to 15GB of data online - free of charge. It sets Baidu up to compete against online storage providers Dropbox and SkyDrive - the service by Microsoft (MSFT) - as well as other dominating market providers. With many details of Baidu Wangpan still under wraps, we can only speculate about whether it will rise to prominent success or fail to catch up with current online storage service providers.

Often branded "China's Google," Baidu currently takes up around 80% of the market share of Internet service provision in China. This doubtlessly puts the company in a strong position to prosper with its Wangpan service, given so many web browsers use the search engine program on a daily basis. At the moment, only 5,000 Internet users are gaining access to the online storage platform each day, and those keen to get started with Baidu Wangpan (which is currently out on beta) can sign up online to claim one of the newly-released accounts. This method of user enrollment prevents an initial overload of the system, with which there may still be glitches, and aims to create excitement and anticipation over what's to come (although only the most tech-savvy are likely to feel this.)

Despite the service still being in its most premature stages, I think the introduction of a cloud storage system by Baidu indicates the company isn't taking its market leading position for granted. Although Baidu does face competition from Google (GOOG), Yahoo (YHOO) and Sina (SINA), none of these companies are even close to matching the popularity of Baidu, which over recent years has only increased its market share. In many cases, this position of strength can bring with it the danger of becoming complacent when it comes to innovation, but Baidu has avoided this common pitfall, and so investors should not be fearful of the company falling behind.

The introduction of Baidu Wangpan comes shortly after the establishment of the Yi Store, Baidu's answer to the new app-based operating systems to hit the market. The Wangpan platform works in sync with Yi-based apps, bringing Baidu up to speed with both Microsoft and Alibaba, the company's regional ISP rival, in providing both app-operated and online storage systems. Although many Internet users have already set up with a competing provider, and are unlikely as of yet to have any major incentive to switch to Baidu, there is still much scope for its services to become widely used. With a staggering 500 million Internet users in China, a large portion of the population do not yet use a cloud storage system, and given Baidu's strong stage presence in the country, it is unlikely to be long before Baidu Wangpan catches on.

But how will Baidu's latest web creation affect its online rivals? The threat to Microsoft is unlikely to be immediate. Microsoft's SkyDrive service offers up to 25GB of free online storage (10GB more than Wangpan,) so there is certainly no pressing motive for those using SkyDrive as an online storage platform to switch to Wangpan. However, as the service gathers speed (which no doubt it will, to some extent) it is going to have some effect on Microsoft. Due to the success of Baidu as a search engine, Wangpan will be able to enter the market with relative ease - and providing the service is clean and well-recommended, will compete readily alongside SkyDrive and Dropbox. Will Wangpan eclipse its competitors? I think this conclusion depends much upon how efficient Wangpan is and how successfully it integrates with other aspects of Baidu's services. If Baidu establishes a way by which Wangpan could benefit the typical web browser, it could prove to be a mean market force, given its number one spot as a Chinese Internet search engine.

A web browser of the west, such as myself, may be surprised to discover that Google doesn't come into the equation as China's most-used search engine. So: where exactly does the Internet giant fit into the picture? Google China is, in fact, China's second-largest search engine after Baidu - lagging behind by a significant distance. Due to issues surrounding censorship in China, Google pulled its service out of the country for a period of three months in 2010, and attempts made to access Google China resulted in re-directions to the Hong Kong version of Google. Even now, a direct link to Google Hong Kong remains on the Google China homepage. These factors have led to Google becoming less of a household name in China as it potentially could have been, with Baidu taking the lucrative top spot instead.

Bearing all of this in mind, let's not forget that it is plausible that Google could one day seek to expand its impact in the enormously untouched Chinese market. With the company's worldwide presence, this isn't a threat Baidu can ignore, and the development of Wangpan shows the company doesn't want to lose momentum. That said, the impact of Wangpan on Google's stock market performance isn't likely going to be prolific for the time being.

When it comes to Yahoo China and local provider Alibaba, prospects are likely to be bleaker. The minority of users sticking with these services now have more incentive to use Baidu with the addition of Wangpan, particularly if the service proves a hit with smart phone users. Baidu's competitors will have to work hard to steal the company's limelight.

Due to market difficulties toward the end of 2011, Baidu's stock market value took a significant hit. Although its share price has increased steadily after a stellar performance throughout 2012, it is still trading at around 15% less than its yearly average value. I predict that shareholders can look forward to healthy returns on their investment as the trading year progresses.

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