Did Baidu Just Kiss Apple Goodbye?

Two months ago, the Baidu (NAS: BIDU) buzz was that China's leading search engine was about to become the default mobile search option for Apple (NAS: AAPL) iPhones sold in the world's most populous nation.


According to Chinese technology website Sina Tech, an iOS update that would integrate Baidu's search functionality into Apple's mobile operating system was in the works. The update could've rolled out as early as April, according to "knowledgeable sources" on the agreement.

Well, obviously that never happened.

You can go your own way
A deal with Apple is certainly possible, but you wouldn't know that from the body language.

Baidu has since gone on to increase its skin in mobile, teaming up with Sichuan Changhong Electric, wireless carrier China Unicom (NYS: CHU) , and even Apple assembler Foxconn to crank out new smartphones based on its Baidu Yi mobile operating system.

The first handsets will be far cheaper than Apple's iPhone, but if the class act of Cupertino sees Baidu as an operating-system threat, won't that make it less likely to throw Baidu a bone?

You've seen Apple and Google (NAS: GOOG) butt heads ever since Big G's Android surpassed iOS in global popularity. The latest rumor is that Apple will replace Google Maps later this year with its own 3-D mapping program.

Apple has a funny way of turning on you when you go from friend to foe.

Rise of the Apple
Right now, it may not seem like that big of a deal. Apple accounted for just 7.5% of China's mobile sales a few months ago. That's less than a third of market leader Samsun's slice of the handset business there. However, one thing holding Apple back in China is that it's not officially available through the country's largest carrier: China Mobile (NYS: CHL) . This is something that should be remedied later this year, though, when the iPhone 5 comes out. Many believe that the new device will overcome the limitations that make it incompatible with China Mobile's 3G network.

With Apple's market share likely to be on the rise after that, why wouldn't Baidu want in? The argument grows even more compelling when you think about the Chinese citizens with the means to afford the pricier iPhones. Aren't they also going to be more attractive to advertisers? As tastemakers, Baidu would hate to see someone else grab that search slot.

Baidu can also use the extra exposure through Apple for two important reasons.

  • Baidu warned of decelerating revenue growth in its disappointing first-quarter results last month.
  • The dot-com darling commands 78% of China's Internet search market, but its piece of mobile search is closer to 35%.

Baidu knows what it's doing, of course. It wouldn't have gone through with Baidu Yi if it didn't think it would either still be a compelling Apple partner or if it thought there would be greater opportunities to make money as a direct competitor.

Baidu has played its hand. Now it's time to see what Apple will do.

Bullish on Baidu
A bullish call on Baidu has served me well on Motley Fool CAPS over the years. True to the CAPScall initiative, I'm not going to give up on it now. Baidu has soared 1,332% since I recommended it to Rule Breakers newsletter service subscribers six years ago, but now it's time to discover the next Rule-Breaking multibagger. It's a free report. Want it? Get it.

At the time this article was published The Motley Fool owns shares of Google, Apple, China Mobile, and Baidu.Motley Fool newsletter serviceshave recommended buying shares of Baidu, Google, and Apple and creating a bull call spread position in Apple. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.Longtime Fool contributorRick Munarrizcalls them as he sees them. He owns no shares in any of the stocks in this story and is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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