China Searches For Answers To Questions About Baidu’s (BIDU) Reliance On Healthcare Ads

The death of a student after an experimental cancer treatment he found through China’s biggest search engine, Baidu, has exposed the fault lines 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, criticized the military-run hospital that provided the failed treatment for misleading claims about its effectiveness and accused Baidu, which controls 80 percent of the Chinese search market, of promoting false medical information.

This week, China’s health ministry began an investigation into the hospital, while its internet regulator started an investigation into Baidu.

The regulators have not said which, if any, rules 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.

It is unclear whether conventional treatment — typically, surgery to remove the tumor — would have cured the rare synovial sarcoma from which Wei suffered.

Reuters has been unable to reach the hospital for comment.

Baidu has come in for fierce online criticism for how it handles advertisements within its search results, especially from an industry as sensitive as healthcare, which analysts at Daiwa and Nomura say provides 20 to 30 percent of the company’s search revenue.

In 2015, search revenue was 55.7 billion yuan ($8.6 billion), or 84 percent of Baidu’s total sales.

“Whatever page you’re looking at on Baidu is a mess of adverts,” a user with the handle FreedLiu said on China’s Weibo microblog, discussing 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 ads and a verification program with additional scrutiny for medical advertisers. “Over the years, we have proactively cleaned up the customer base,” a company representative said by email.

This case does not represent the first time Baidu has fallen afoul of regulators and public opinion for its handling of healthcare ads and blogs, although it has not suffered substantive sanctions.

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

And, in January, Baidu apologized for management failures when the internet regulator found illegal content in its search results and online forums, including ads for unlicensed clinics. The company also sold the rights to manage a disease discussion site to a firm selling treatment for that illness, forum users said.

“Baidu has had issues come up about the types of medical ads they accept since 2008,” said Mark Natkin, managing director of Marbridge Consulting in Beijing.

Bad Press

Like most search engines, Baidu places paid advertising within its search results, but in a series of Reuters search tests it included at least twice as many ads as Alphabet’s Google search engine, which is blocked in China, and placed them higher in its list. Although Baidu marks such items as promotions, Google also highlights the word “Ad” in a yellow box.

Baidu’s representative said the number of ads on a page depended on the search subject and whether it was on a personal computer or a mobile device, but declined to give specifics for healthcare-related searches.

Google’s policies list a string of restrictions on healthcare advertising, and several searches by Reuters for health-related terms on the search engine produced no ads.

Baidu’s comparatively small local rival Qihoo 360 Technology said it does not support healthcare industry ads.

Baidu said its requirements for healthcare ads “are not public information, and we can only share that with our advertising customers.”

Criticism in several state media outlets this week points to a hardening attitude in government.

“Pursuing profits is not wrong, but putting profits over helpless patients’ lives is against any ethical standards,” a column in the official People’s Daily said Monday.

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.

The regulator did not return requests for comment on the possibility of any such action.

Daiwa said between 10 and 15 percent of Baidu’s search revenue could evaporate under a worst-case scenario.

Even without such measures, the damage to Baidu’s reputation could hit it in the pocket.

“The overwhelming negative press coverage over this incident could once again shake internet users’ trust in Baidu’s search results, especially when people search for healthcare-related information,” Nomura said. “This would, in turn, affect the performance for healthcare-related ads on Baidu, in our view.”