Advertising Revenue Contracts as Baidu Reconfigures Core Search Business amid AI Transition Pains

The once-ubiquitous tagline “For any question, just Baidu it” reflects a company identity that is undergoing profound change. Founded in 2000, Baidu dominated the PC internet era with search-driven advertising as its primary revenue source, but the rise of social and short-video platforms such as Douyin and Xiaohongshu has steadily eroded that advantage.

On August 20, Baidu released its Q2 2025 financial report, showing core revenue—excluding iQIYI—of RMB 26.3 billion, a 2% year-on-year decline, while net profit attributable to the core business rose 35% to RMB 7.4 billion. Advertising income, however, fell 15% to RMB 16.2 billion, contrasting sharply with non-advertising revenue of RMB 10 billion, which climbed 34% year-on-year.

In a bid to revitalize its search franchise, Baidu on July 2 unveiled the most extensive overhaul in a decade, replacing its narrow search bar with an expanded “smart box.” By July, 64% of mobile search result pages incorporated AI-generated content, and Baidu App’s monthly active users reached 735 million in June 2025, up 5% year-on-year. Hosted pages now contribute half of the core online marketing revenue for Q2.

Despite these AI-powered changes, advertising revenue has declined for five consecutive quarters. Year-on-year drops of 2%, 4%, and 7% were recorded in Q2, Q3, and Q4 of 2024, respectively, followed by a 6% fall in Q1 2025, and by Q2 of this year the 15% contraction persisted.

Addressing the downturn at the Q2 earnings call, Luo Rong, Executive Vice President and General Manager of Baidu’s Mobile Ecosystem Group, acknowledged that AI search remains in its early monetization phase. He warned that short-term revenue and profit pressures would continue, but affirmed Baidu’s strong long-term position.

Externally, Baidu’s legacy traffic is being divided among mobile-native rivals, prompting structural changes in its advertising channels. In July, the company announced it would replace exclusive agency agreements in six cities—Jinan, Chongqing, Wuhan, Fuzhou, and Xiamen—with an open service-provider model. Industry analysts suggest this shift will increase operational complexity and costs, but may stimulate competition on pricing and service quality to recover lost ad revenue.

While its traditional advertising “cash cow” contracts, Baidu’s AI initiatives are generating fresh income streams. In Q1 2025, non-advertising revenue reached RMB 9.4 billion, up 40% year-on-year, driven by its intelligent cloud business. Founder Robin Li disclosed that Baidu is developing the next-generation flagship version of its Ernie model, with significant enhancements to key functions, and reiterated the company’s commitment to seizing high-potential market opportunities.

Reflecting a strategic pivot from its former closed-source stance, Baidu in February abandoned proprietary development. By March, Ernie 4.5 and Ernie X1 were launched on the Wenxin Yiyan platform with free consumer access, and in June the Ernie 4.5 series was open-sourced. Nonetheless, Baidu faces intense competition from well-funded peers such as Alibaba and ByteDance, as well as rising challengers like DeepSeek, all reshaping China’s AI landscape.

Beyond foundational models, Baidu’s flagship AIGC application Wenxin Yiyan—later renamed Wenxiaoyan—has faced user retention challenges. In March, it recorded 8.87 million monthly active users, ranking behind DeepSeek, Doubao, Tencent Yuanbao, Kimi, and Jimeng AI. Observers attribute this gap to Wenxiaoyan’s late adoption of a free-access model and limited entry points, contrasting with rival apps that integrate high-frequency tools and services to drive engagement. On August 21, Baidu’s shares closed at HKD 85.00 on the Hong Kong Stock Exchange, down 2.58%, with a market capitalization near HKD 233.8 billion.