Baidu vs. Facebook – Chalk and cheese

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Baidu still No. 2 in AI.  

• Comparing how Baidu is using AI to manage user generated content to how Facebook is faring, is a further sign of just how far behind Facebook is and how shareholders will be paying the price for it.
• iQiyi is Baidu’s equivalent of YouTube and Netflix mixed together which has recently had a moderately successful IPO on Nasdaq.
• Prior to its IPO, iQiyi was a fully owned subsidiary of Baidu and as a result, it has had full access to Baidu’s AI and algorithms.
• Now that it is a public company, iQiyi is more vocal and its latest claim makes interesting reading.
• Between 2012 and 2017 the quantity of content on its service has increased 20x but iQiyi has only needed to double the number of content censors that it employs to 500.
• The requirement by content distributers to control the content available on their services is much greater in China meaning that iQiyi has to cast its net much wider and can ill afford any slip-ups.
• By contrast, Facebook has much more scope for slip-ups as it has immunity from the content that users post on its site, but it is still recruiting an additional 10,000 humans to review the content that is posted.
• This will bring the total of employees working on safety and security to around 20,000.
• As of March 2018, Facebook had 27,742 employees meaning that once the current recruitment drive is over, employees in non-revenue generating or product generating roles will be well over 50% of the company.
• This is why Facebook is guiding for OPEX to increase by 40-60% this year which I think will be much faster then revenue growth, leading to a fall in margins.
• Furthermore, I don’t think that humans are well suited to these tasks as they are much slower than machines meaning that content is often viewed by millions before the editors can get to it (see here).
• This was further evidenced by Facebook’s own disclosure earlier this month where analysis of its figures implied that it takes an average of 11.7 days to spot and delete fake accounts that appear on its service (see here).
• This is despite Facebook’s claim that it is “usually” able to find and deactivate these accounts within minutes.
• This is quite a contrast to Baidu which appears to have a much better grip on the content that is available on its services, underpinning RFM’s conclusion that when it comes to AI, Baidu is the global No. 2 behind Google.
• In RFM’s opinion, Facebook remains at the back of the pack alongside Tencent and Xiaomi.
• AI is going to be Facebook’s Achilles heel for some time to come as progress is very slow meaning that the current margin compression is likely to remain in place for a while.
• Consequently, I think that there is worse to come in 2018 for Facebook and remain very cautious on the shares.
• I would much rather own Baidu which is the cheapest AI investment available today or Apple where its business model completely isolates it from any of the privacy backlash going on at the moment.