Baidu's business faultlines exposed

Student's death sparks fresh scrutiny of search engine's reliance on healthcare ads

BEIJING • The death of a student following experimental cancer treatment that he found through China's biggest search engine Baidu has exposed faultlines in the company's business model, which relies heavily on income from the country's lightly regulated health sector.

Before his death, student Wei Zexi, 21, criticised the military-run hospital that provided the failed treatment for misleading claims about its effectiveness and accused Baidu, which controls 80 per cent of the Chinese search market, of promoting false medical information.

Last week, the health ministry began an investigation into the hospital, while the Internet regulator began an investigation into Baidu.

The regulators have not said what, if any, offences or regulations might have been broken, and did not respond to requests for comment.

Analysts at Daiwa said regulators could be checking for compliance with China's Advertisements Law, which says medical sector advertising should not contain assertions about effectiveness.

Baidu said it was also conducting an investigation and would fully cooperate with the regulator.

Baidu has come under fierce online criticism for how it handles adverts within its search results, especially from an industry as sensitive as healthcare, which analysts at Nomura and Daiwa say provides 20 per cent to 30 per cent of its search revenues.

In 2015, search revenues were 55.7 billion yuan (S$11 billion), or 84 per cent of Baidu's total sales.

"Whatever page you're looking at on Baidu is a mess of adverts," said username FreedLiu on China's Weibo microblog, discussing Mr Wei. "They're profiting from loads of people who don't know Baidu auctions (its search results)."

Baidu said it applied particular vigilance to healthcare customers, with screening for misleading adverts and a verification programme with additional scrutiny for medical advertisers. "Over the years, we have proactively cleaned up the customer base," a company spokesman said by e-mail.

It is not the first time the company has fallen foul of regulators and public opinion for its handling of healthcare ads and blogs, though it has not suffered substantive sanctions.

In 2008, it said it would overhaul its operations after state media said it had allowed unlicensed medical service providers buy high search rankings. The hospital that treated Mr Wei, however, is licensed by the Beijing municipal government.

And in January, Baidu apologised for management failures when the Internet regulator found illegal content in its search results and online forums, including ads for unlicensed clinics.

Any decision by authorities to restrict healthcare advertising could have a material impact on Baidu's earnings, a concern that has contributed to a sharp fall in its shares in the last three sessions.

Daiwa said 10 per cent to 15 per cent of Baidu's search revenue could evaporate under a worst-case scenario.

REUTERS

A version of this article appeared in the print edition of The Sunday Times on May 08, 2016, with the headline 'Baidu's business faultlines exposed'. Print Edition | Subscribe