Baidu Must Fix This or Die

Baidu (Nasdaq: BIDU  ) , the dominant Chinese search engine, is following a path dangerously close to Yahoo! (Nasdaq: YHOO  ) of the mid-2000s. They must fix this or they face long-term market-share declines and eventual disruption by an existing player like Google (Nasdaq: GOOG  ) or more likely a Chinese start-up that has yet to be formed.  

Why Google beat Yahoo! in search
In 2004, Yahoo! rolled out a program called Search Submit. This allowed advertisers to buy paid advertising within the normal search results, which ultimately decayed Yahoo!'s usefulness as a search engine. Below is a modern-day Google search results page:

Items shaded blue are unpaid, algorithmically ranked results, while the items in red are clearly marked sponsored results. Check it for yourself on a search for stock advice. (And be sure to click the first unpaid result!)

By launching their so-named "paid inclusion" program, Yahoo! allowed advertisers to buy their way into blue portion of their search results. Since they were no longer ranking results based on relevance, but by advertising spend, it is easy to conclude that the blue results became less and less relevant over time.

This ultimately allowed Google to have increasingly more relevant results than Yahoo!, which added to their market dominance.

Baidu using Yahoo!'s roadmap?
Baidu has been criticized in the past for essentially the same practice, and a recent Barron's article touts how they've fixed the several year old issue:

In another move, Baidu has discontinued the "paid search" system of advertising and switched to the new Phoenix Nest system, which helps to clearly distinguish between search ads and organic search results and helps clients closely track the effectiveness of their ad spots.

While they may have cleaned up their act somewhat, they still have paid ads in unmarked positions. Below is a translated search in Baidu for "investing."

By looking at the way Baidu differently treats links that are paid and unpaid, I was able to distinguish and highlight the different types of placements. As with the Google search results, red are paid and blue are unpaid placements.  

Unlike Google, these paid listings are the majority of the page and are unmarked. Like Yahoo! of the mid 2000s, this practice will ultimately diminish their relevance and leave them open to disruption from a (for lack of a better phrase) less evil competitor.

Fix this now, Baidu. You may take a short-term revenue hit, but you'll enjoy long-term success by having a better experience for your users.

Are you invested in Baidu? Do you think this matters in the long term? Leave your thoughts in the comments box below.

Jeremy Phillips does not own any companies mentioned in this article. Baidu and Google are Motley Fool Rule Breakers picks. The Fool owns shares of Google. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

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