Chinese Probe Casts Chill Over Baidu's Search Ad Business

The Case Raises Questions About Placement of Paid Search Ads from Health Companies

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A woman walks past the Baidu logo at the company's headquarters in Beijing, China.
A woman walks past the Baidu logo at the company's headquarters in Beijing, China. Credit: Tomohiro Ohsumi/Bloomberg

A Chinese government investigation into Baidu's search business following the death of a cancer-stricken college student threatens one of its largest sources of advertising revenue.

Health and internet regulators launched a probe into the Chinese online giant's practices after computer science major Wei Zexi sought out a controversial treatment advertised among search results. But the procedure failed and the 21-year-old penned online posts blaming Baidu before his death, triggering an online uproar in a country that's seen its share of health-related scandals over the years.

Baidu shares fell by the most in nine months after the Cyberspace Administration of China, the national health commission and the top industry regulator announced they would dispatch a team of investigators in the wake of the incident. The company has said it will cooperate with regulators and work to root out false information on the internet.

Concerted scrutiny may prompt Baidu to pull back from health-care ads, one of its biggest sources of income, said Kirk Boodry, an analyst from New Street Research. The company's shares fell 7.9% Monday, the second-worst performance in the Bloomberg China-U.S. Equity Index that day.

"That's the economic segment where they get most of their revenues, so anything that happens in that segment is material to the company," he said. This could include Baidu voluntarily rejecting ads from certain providers, he added. "The fact that the government has stepped in to take a look at the issue indicates to us that there could be some near-term impact."

Baidu is the world's second biggest player in search advertising after Google, according to eMarketer. Medical ads account for 20 to 25% of Baidu's search revenue, though that includes everything from pharmaceuticals to medical devices, estimates Karen Chan, an analyst with Jefferies Hong Kong. The cyber-administration summoned Baidu Chairman Robin Li for a meeting on Monday, Sina news reported, citing staff it did not identify. The scrutiny comes at a critical time for Baidu, which is hunting for new sources of profit as consumers move away from desktop computers where it dominates in China. Any move that harms its business could also reduce its ability to invest in technologies like self-driving cars and on-demand services.

In 2014, Liang Jianyong, then party secretary of Putian, told China National Radio that private hospital companies from the city spent close to 10 billion yuan ($1.5 billion) advertising on Baidu. That compares with Baidu's total revenue in 2013 and 2014 of 32 billion yuan and 49 billion yuan, respectively, according to data compiled by Bloomberg.

Mr. Wei's case was the latest in a series of incidents that has put Baidu's health-care advertisements in the crosshairs of Chinese regulators and internet users. It saw another backlash this year when users on its online forum complained that the company had sold the rights to operate disease-specific forums, where patients share experiences, to private hospitals that used them to attract patients. The company agreed to end the business practice after users protested. Back in 2008, the company removed paid search listings of unlicensed medical and pharmaceutical companies, which sent the company's stock tumbling 25%.

In the latest flare-up, the Internet search giant is accused of placing ads for a controversial medical practice from a Beijing-area hospital into its results. Mr. Wei suffered a rare form of cancer called synovial sarcoma. After receiving radiation and chemotherapy, according to the South China Morning Post, he used Baidu to search for alternative treatments and opted for a form of immunotherapy at the hospital based on recommended results. The treatment, which employs cells generated by the patient's immune system, and cost Wei's family about $31,000, the newspaper reported. The student died last month.

"This seriously damages the brand, and I don't think Baidu is doing well in terms of PR protection because they didn't respond in a fast and proper way," said Li Yang, an assistant Professor of Marketing from Cheung Kong Graduate School of Business. "Even if people change topics in a few days, this negative image of Baidu's brand will still persist in many people's minds."

China's health-care system is crowded with thousands of clinics and medical businesses, making it harder for regulators to police. Baidu said on its Weibo account that the hospital Wei used was top-tier and had provided the search engine with proper certification. It understands the sensitivity of health-care ads and applies extra vigilance, Tracy Hu, a spokeswoman for Baidu, said in an e-mailed statement.

"We have proactively cleaned up the customer base, efforts which include rigorous standards of certification, careful screening of potentially misleading ads," she said.

In response to heightened public attention to Wei's case, national and military health authorities have launched an investigation into the hospital, which is affiliated to China's armed police force, the National Health and Family Planning Commission said in a statement published on its website on Tuesday. Phone calls to the hospital, called the Second Hospital of the Beijing Armed Police Corps, went unanswered.

--Bloomberg News, with Ad Age staff --

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