INTERNET: Baidu in Gambling Scandal, Eyes Credit Scoring

Bottom line: Baidu could suffer more lost business after purging stealth advertisers engaged in gambling and sex services, while its new credit-scoring tie-up looks like a smart way to take advantage of its huge volumes of user data.

Baidu purges search results of online gambling sites

A day after appearing in 2 major global entertainment stories, online search leader Baidu (Nasdaq: BIDU) is back in the headlines at home in a new scandal involving online gambling sites that used stealth methods to promote themselves on Baidu’s search service. Normally I would say this particular scandal looks relatively minor and wouldn’t have a major impact on Baidu. But such scandals have suddenly become much bigger news following one back in May, which was centered on Baidu’s longtime practice of combining paid search results with organic ones without disclosing that mixture.

At the same time, Baidu is in another smaller but potentially significant headline, forming a tie-up with a US start-up that specializes in evaluating credit for individuals and businesses using big data. The more aggressive Alibaba (NYSE: BABA) has already been a leader in that particular space, following the launch of a service called Sesame Credit by its affiliated Ant Financial unit earlier this year.

These latest 2 headlines continue an unusually busy news period for Baidu, whose founder Robin Li is reportedly part of a group close to a deal to buy a major stake in Italian soccer club AC Milan. At the same time, Baidu was also in headlines earlier this week when media reported the company was rebuffed in a recent bid to buy a stake in major Hollywood studio Paramount. (previous post)

By comparison, the latest 2 headlines involving Baidu are relatively local, beginning with the new scandal involving gambling sites that used stealth means to promote themselves in Baidu’s search results. The illegal sites used accounts registered by more legitimate advertisers to promote their services in the overnight hours, catering to lovers of past-times that are popular but also illegal in China. (Chinese article; English article) Other abusers of the system included sellers of sex toys and other adult entertainment products.

Exposed by Investigative Report

The actual abuse was uncovered by an investigative newspaper report, but Baidu has responded by saying it conducted its own investigation and has reported violators to the police. Perhaps Baidu is being sincere and really didn’t know this kind of abuse was happening. But it’s also quite possible it knew and simply feigned ignorance.

Again, the probable reality is that many of these accounts were set up by such gray-area advertisers who used them for legitimate but unimportant products and services during the day. Instead, their real aim was to promote more profitable gambling and sex services at night. Baidu’s advertising business could take a new hit if it’s forced to purge theses accounts, though that would be far smaller than the damage it suffered after the scandal involving lack of transparency in paid search results back in May.

Meantime, the second story involving a credit scoring initiative looks like a positive move for Baidu, though as is often the case, it’s coming a bit late to the game compared to its more aggressive rivals. That partnership will see Baidu invest in US start-up ZestFinance to develop credit-rating services using Baidu’s huge banks of big data from people and businesses who use its search engine. (company announcement; Chinese article)

Alibaba has been the most aggressive by far of China’s big 3 Internet companies in financial services, launching a wide array of products. Tencent (HKEx: 700) has been active though less aggressive, operating a popular electronic payments service and also investing in an online bank that is part of a pilot program by Beijing. Baidu has also made some half-hearted previous attempts to enter the space, though this looks like one of the better-conceived plans that will take advantage of its huge volume of user data.

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