Baidu Bites Back

Humbled by a scathing expose on its advertising practices, Baidu.com (Nasdaq: BIDU  ) presented a conference call yesterday to address the situation.

"With influence comes responsibility," CEO Robin Li said during an analyst conference call, where he explained the company's new initiatives to remove unlicensed medical advertisers from its site.

It's notable that Li would paraphrase Peter "Spider-Man" Parker's phrase, "with great power comes great responsibility." Investors have seen Baidu cast more as a villain than a hero this week.

Baidu's pain started during the weekend, when China Central Television ran an investigative feature pointing out that Baidu's paid-search clients include thousands of unlicensed pharmaceutical companies. An even more sinister allegation suggests that Baidu is excluding certain non-advertising companies from its search results.

Baidu refutes the final point. It claims that it has never included or excluded relevant results from its organic searches. Advertisers do bid for front-page placement -- just as they do stateside on Yahoo! (Nasdaq: YHOO  ) , Google (Nasdaq: GOOG  ) , and Microsoft's (Nasdaq: MSFT  ) Live.com -- but Baidu claims that all sponsored listings are labeled as promotional.

Either way, Baidu has a reputation to restore. The company claims that no Chinese laws prohibit unlicensed companies from using paid-search platforms, but it has now removed medical companies -- thousands of them -- that don't have licenses on file with Baidu.

The suspended advertisers account for 10% to 15% of the company's revenue. However, a failure to have their licenses on file with Baidu doesn't necessarily mean those companies are unlicensed. As companies send over their licenses for review, Baidu will reactivate their accounts.

The damage to Baidu's stock has been brutal. It closed last week at $178.89, and it's done nothing but fall through this week's first three trading days.

 

Close

Loss

11/17/08

$134.09

25%

11/18/08

$128.76

4%

11/19/08

$111.75

13%

The tab is a nearly 38% plunge in price. This obviously isn't about the 10% to 15% near-term -- and hopefully temporary -- hit. Licensed advertisers will add to the pot with lower winning bids, for now. Many of the unlicensed merchants will clean up their acts.

The bigger reason for the tumble is the fear that Baidu's credibility will take a hit with consumers. Baidu generates all but roughly a third of China's search -engine traffic. If Internet users flock to smaller engines in China, such as Google or Sohu.com's (Nasdaq: SOHU  ) Sogou, that will have a bigger impact on the company's ability to drum up high bids for advertiser leads in the future.

Baidu is doing the right thing -- attacking the flaws in the expose, but fixing the areas where the feature was on target, at least as it pertains to the court of public opinion. If Baidu ever kidded itself into thinking that it was above being a model corporate citizen, that notion is history.

With influence comes responsibility?

With great power comes great responsibility?

No, the lesson is more basic than that. With great share loss comes great humility.

Other recent Baidu headlines:

Microsoft is a Motley Fool Inside Value selection. Google and Baidu.com are Motley Fool Rule Breakers recommendations. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz has been to mainland China just once, but he's longing to brush up on Mandarin and make it another go. He owns no shares in any of the companies mentioned in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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