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Baidu Will Overcome Its Latest Crisis

By Rick Munarriz - May 10, 2016 at 11:46AM

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The government cracks down on healthcare advertising on search engines, but it's not the end for China's leading search engine.

Image source: Baidu.

It's going to be hard for Baidu (BIDU -1.64%) to keep making as much money as it used to from its search engine's healthcare advertisers. Chinese regulators are cracking down on the platform after a Chinese university student died late last month after seeking cancer treatment from an advertiser on Baidu's search engine, and obviously it didn't end well. 

The university student took to social media in his final days, calling out the Second Hospital of Beijing Armed Police Corps for making false medical claims. He also took Baidu to task for the promotion of those allegedly misleading claims. The complaints went viral, and now the country is doing something about it.

Representatives from three regulatory agencies -- the Cyberspace Administration of China, the State Administration of Industry and Commerce, and the National Health and Family Planning Commission -- met with China's leading search engine to discuss the situation. They are ordering Baidu to make sure that healthcare ads don't make up more than 30% of a query results page. The more problematic stipulation is that the regulators want Baidu to base the positioning of the ads on more than merely the highest bidder. They want the dot-com giant to modify the existing auction-based paid search platform when it comes to healthcare-related advertisers, considering the credibility and reputation of the listed sponsors. It also wants Baidu to do a better job of distinguishing paid from organic search results, including the singling out of associated risks. 

Regulators also want Baidu to stop providing online marketing services to medical organizations if they can't furnish requisite qualifications from the appropriate regulatory authorities.

Baidu responded this morning, agreeing to incorporate the requests by the end of this month. It's also setting aside some money to compensate its users who have been harmed or will be harmed by the misleading marketing information that appears on its search engine.

This is a pretty big deal. Analysts believe that as much as 30% of its paid search revenue is coming from medical, pharmaceutical, and healthcare-related advertisers. 

The stock only surrendered 3% of its value yesterday following the regulatory news, but the shares are down 13% this month since the initial story broke. In short, the carnage was largely baked into the price ahead of the regulatory agencies deciding on what to do here.

Bulls want to party like it's 2008
If Baidu catching regulatory grief over its marketing practices concerning medical advertisers sounds familiar, it's because it got called out in late 2008. That proved to be an opportunistic time to buy into Baidu. The stock has been one of the market's biggest winners, soaring 16-fold since bottoming out in late 2008. 

The requirements will sting. Baidu will initially make less on its search queries, and setting aside more than $150 million to cover any claims isn't chump change. However, these hoops and new exposure to liabilities will also make it that much harder for a rival search engine -- much less a foreign platform -- to eat into Baidu's dominant market share.

Baidu is doing the right thing. It's quickly owning up to its shortcomings, something that will cost it financially for now but will keep its fan base loyal. We may have to wait until the third quarter to see the full impact of the move since these initiatives will kick in two-thirds of the way through the current quarter. However, Baidu has history on its side. It rights its wrongs, and investors get rewarded along the way. 

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