The news: Last week Baidu posted its steepest revenue drop on record, raising questions about whether its long-term AI plans will depress growth for too long—and whether a similar plunge could happen to US companies.

The Chinese search giant’s digital advertising business, which makes up over half its total revenues, fell 18% YoY. Search-anchored online marketing revenues have now contracted 15% to 18% for multiple quarters. The slowdown will continue into Q4 as Baidu rolls out more AI-generated results, which will likely depress monetization in the near term.

Pivoting to AI: Baidu’s Ernie Bot is one of China’s most used conversational AI tools, widely framed as the country’s domestic alternative to ChatGPT. The company recently upgraded its foundational model to Ernie 5.0, a multimodal system that now surfaces AI-generated answers on 64% of mobile search pages, per Reuters. Roughly 70% of all Baidu results now include AI responses.

But AI investments have not lifted financial results yet, competitors like Alibaba’s Qwen and DeepSeek reportedly outperform Ernie on model quality, and platforms with stronger distribution like TikTok or Douyin are gaining chatbot users simply because they control the traffic pipelines required for monetization.

Meanwhile, Chinese ad players like Tencent, PDD Holdings, and TikTok parent ByteDance have posted 20% to 30% YoY ad growth, suggesting that Baidu’s downturn is structural, not market-wide. We forecast Baidu's 2025 search ad revenues to be down 5.2% YoY, followed by a 4.7% contraction next year.

Why it matters: Baidu is not a perfect analog for Google or the US digital ad market—China’s macro environment intensifies the strain—but its rough quarter is a stress test for what happens when a search-anchored ad model meets macro pressure and aggressive AI integration before monetization catches up.

When AI answers satisfy queries, users click fewer ads and links. Baidu management has publicly warned that AI will weigh on search monetization until new ad formats mature.

Where the US is different—for now:

• Diversification: Google isn’t the sole driver of US digital advertising. Meta, Amazon, TikTok, retail media networks, and CTV platforms all capture meaningful share, reducing systemic risk if search ad growth slows.