(Bloomberg) — Baidu Inc.’s revenue slipped slightly, hurt by an economic downturn that’s capping its ability to fight bigger rivals in AI and make inroads in new growth areas.

The Ernie chatbot creator’s sales in the June quarter fell 4% to 32.7 billion yuan ($4.6 billion), weighed down by a slowdown in its core internet search operations. Net income rose a surprise 33%, versus projections for a decline, helped by a boost from long-term investments.

China’s internet search leader is betting big on generative AI to drive future growth, but it faces mounting pressure from rising open-sourced models like DeepSeek as well as a wave of AI-native apps encroaching on its turf. 

That’s while its mainstay search business is losing ground to social-video platforms like Xiaohongshu and TikTok’s Chinese twin Douyin. Online advertising revenue declined 15%, in line with estimates. Its non-marketing revenue grew a better-than-expected 34%, aided by demand for its cloud unit.

Baidu is counting on Ernie to underpin a cloud-to-app AI ecosystem and drive demand for its cloud division, whose sales have grown by double-digits in recent quarters. It’s also planning to accelerate its Apollo Go robotaxi service’s overseas expansion in its hunt for new revenue. Baidu’s driverless rides in the June quarter more than doubled to 2.2 million, with cumulative rides passing 14 million in August, it said. 

“We remain focused on AI initiatives,” co-founder Robin Li said in a statement.

But in China’s increasingly crowded AI arena, Baidu faces rivals Alibaba Group Holding Ltd. and Tencent Holdings Ltd. — both with far bigger firepower and global footprint — as well as nimble upstarts. Baidu’s stock price is up around 6% this year, trailing both of the bigger internet leaders in a market buoyed by optimism for Chinese AI competitiveness.

Baidu’s Ernie was one of the first chatbots to launch in the world’s biggest internet arena, but it’s since lost ground to apps from ByteDance Ltd. and Tencent as well as open-sourced models like Alibaba’s Qwen. The company has had to abandon its paid subscription model as well as open-source its proprietary Ernie models.

That’s as Baidu’s Netflix-style subsidiary iQiyi Inc. reported an 11% revenue drop. The embattled streaming platform is seeking to raise $300 million for a listing in Hong Kong this year, Bloomberg News has reported.

A push to commercialize AI is gaining traction in autonomous driving, however. Baidu plans to take its fleet of self-driving robotaxis — common in Beijing, Guangzhou and Wuhan — to Singapore and Malaysia as early as this year, Bloomberg reported. The company is now running trials in Hong Kong.

What Bloomberg Intelligence Says

Baidu faces a difficult future, with its AI ventures set to lose money for at least the next three years. We expect its search-engine profit to stay under sustained pressure due to rising uncertainty in China’s corporate sector and competition from contemporary social media platforms.

– Robert Lea, senior analyst

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(Updates with details from earnings statement.)

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