China’s Baidu sees slow recovery of online advertising business amid stricter industry regulations

PUBLISHED : Friday, 29 July, 2016, 4:16pm
UPDATED : Friday, 29 July, 2016, 11:29pm

Chinese internet search giant Baidu faces a slow recovery in its core advertising business amid tough measures imposed by regulators, following public outrage over the death of university student Wei Zexi linked to a cancer treatment he found online.

“The implementation of new regulations, and the stricter standards that we proactively imposed to make our platform more robust, will likely suppress revenue for the next two to three quarters,” Baidu founder and chief executive Robin Li Yanhong said in a conference call with analysts on Friday. “This period of uncertainty will pass.”

That may have been a worse-than-expected assessment from Li, as analysts previously forecast the impact of more stringent regulation in Baidu’s online advertising revenue could ease up later this year.

“Our users come first,” Li said. “The stricter standards and regulations will enhance the user experience, and have a long term positive impact resulting in a healthier industry environment.”

Baidu, which commands about an 80 per cent share of China’s online search market, had earlier reported a 34 per cent drop in net profit in the second quarter to 2.41 billion yuan (HK$2.81 billion), down from 3.66 billion yuan in the same period last year.

The stricter standards and regulations will enhance the user experience
Robin Li, Baidu CEO

That was the Beijing-based company’s worst quarterly decrease in profit, which resulted from a modest 4 per cent year on year growth in its online marketing revenue that reached 16.94 billion yuan.

Online marketing revenue, which has always made up the bulk of Nasdaq-listed Baidu’s income, grew 37 per cent to 16.23 billion yuan in the second quarter of last year, by comparison.

Jefferies equity analyst Karen Chan said in a report that Baidu’s increase in net profit last quarter earnings was “mainly helped by cost control in sales and marketing dollars”.

Total revenue in the three months to June advanced 10 per cent to 18.26 billion yuan, up from 16.57 billion yuan a year earlier, which marked the company’s slowest quarterly growth since it was listed in the US in 2005.

Baidu has forecast its third-quarter revenue to range from 18.04 billion yuan to 18.58 billion yuan, representing a year on year decrease of 1.9 per cent to an increase of 1.1 per cent.

The company was investigated in May by a task force set up by regulators the Cyberspace Administration of China, the State Administration for Industry and Commerce, and the National Health and Family Planning Commission.

The probe was conducted in response to the death of 21-year-old Wei, a computer science student from Shaanxi province, who had suffered from a rare form of cancer and sought an experimental medical treatment at a hospital in Beijing that topped a Baidu search result.

Wei chronicled online the ineffective treatment he received, and his death in April prompted a public outcry.

Baidu was ordered by regulators in May to strictly limit advertising per page and clean up its medical-related paid-search business.

Early this month, the State Administration for Industry and Commerce promulgated regulations to protect consumers against false claims and to prevent misleading practises in online advertising. These regulations will take effect on September 1. There are currently no national laws which regulate China’s online advertising business.

“We have taken immediate action to improve the user experience by reducing the number of sponsored links, and further upgrading user feedback and user protection mechanisms,” Li said. “We’ve required all customers to show ICP (internet content provider) licenses and verified enterprise accounts. Internally, we have implemented a full review of key performance indicators.”