Internet | Probe casts chill over Baidu’s advertising business

A Chinese government investigation into Baidu Inc.’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 furore 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 percent 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.”
Medical ads account for 20 to 25 percent of Baidu’s search revenue though that includes everything from pharmaceuticals to medical devices, estimates Karen Chan, an analyst with Jefferies Hong Kong Ltd. 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 (USD1.5 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.
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.  Bloomberg