INTERNET: Baidu, Ctrip Battle with Fraudsters

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Bottom line: New scandals involving fraudsters using Baidu and Ctrip platforms highlight a major problem for major web companies from third-party merchants, but are unlikely to have a big impact on their business.

Frausters make headaches for Baidu, Ctrip

Two new scandals involving leading travel services provider Ctrip (Nasdaq: CTRP) and top search engine Baidu (Nasdaq: BIDU) are shining a spotlight on the daily battle China’s top Internet firms must do with the hundreds of fraudsters lurking online. The first case has Baidu dealing with fraudsters who tried to sell products on its Tieba social communities service, while Ctrip has landing in trouble after 2 people bought invalid tickets from independent travel agencies on one of its open marketplaces.

The biggest case for this kind of fraud came a year ago, when China’s commerce regulator released a report showing huge volumes of trafficking in pirated goods on the Taobao marketplace operated by leading e-commerce site Alibaba (NYSE: BABA). In all of these cases the fraud isn’t being directly committed by the big-name companies, but rather by small, third-party merchants doing business on their sites. But the big Internet names are realizing that they are ultimately responsible for the reliability of all transactions taking place on their sites.

Somewhat ironically, many of China’s big name Internet companies were once guilty of similar practices that are now causing them headaches. Baidu was a good example, operating a Napster-like peer-to-peer (P2P) song-swapping site for years that led to criticism and several high-profile lawsuits over copyright violations. But as these companies have matured, most have gradually tried to weed out this kind of activity, even though some users of their sites and services still engage in such activity.

Let’s begin with Baidu, whose latest headaches came in an area of its site where netizens could discuss disease-related topics on a social networking service called Tieba. (Chinese article) I’m not a user of Tieba,  so I can’t say exactly how it works. But it appears some fraudsters were trying to peddle fake medicines and other disease-curing services in the community, forcing Baidu to ban most such commercial activity from the site.

Like most Internet companies, Baidu is looking for ways  to monetize many of its free services outside its core online search business, and was apparently allowing companies to buy forms of advertising in these targeted Tieba communities. This certainly isn’t the first case of fraudulent advertising in China, and Baidu isn’t the only company that has grappled with the problem. But as operator of Tieba, it rightly realized it had a responsibility to ensure that fraudulent ads weren’t being run on the service.

Next there’s Ctrip, whose woes stem from 2 cases involving people who bought plane tickets in its open-platform marketplace where independent travel agents sell goods and services to travelers. In both cases, consumers purchased plane tickets over the platform, only to later discover the tickets were invalid. (Chinese article)

This particular case comes only a week after Ctrip’s sister company Qunar (Nasdaq: QUNR), which is controlled by Baidu, was banned by some of China’s top airlines for similar irregularities on its site. (previous post) Both Ctrip and Qunar operate open marketplaces where third-party travel agents offer products and services to consumers, though Ctrip also offers such items directly over its original, older service.

At the end of the day, these kinds of scandals are quite common and will continue to plague China’s big Internet companies, which is one reason I don’t always write about them. Most of the scandals aren’t big enough to cause major damage, though last year’s piracy scandal at Alibaba was an exception due to the company’s size and the government’s involvement. In both of these latest cases I do expect that Baidu and Ctrip will take care of the problems with little or no major impact on their day-to-day business.

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