INTERNET: Baidu Scandal Unleashes Crackdown Wave

Bottom line: A flurry of new corporate crackdowns will have the biggest impact on Baidu due to its role in a scandal over false advertising claims, and indicates this year’s summer crackdown season could be hotter than usual.

China cracks down on web merchants, drug makers

Summertime in China is a season for crackdowns, and we’re getting a taste of a potentially hot summer ahead fueled by a high-profile scandal involving false advertising claims on leading search engine Baidu (Nasdaq: BIDU). Three separate crackdowns are in the headlines as we begin the new week, including 2 that look potentially tied to the Baidu scandal.

That scandal consumed China for much of last week, after a student with cancer claimed he was duped into seeking treatment at a hospital that made false claims about its ability to treat his disease. (previous post) In his long list of complaints before he died of his illness, Wang Zexi also accused Baidu of deception for putting the hospital and its inflated claims high in his search results simply because the hospital paid a rich premium for such high placement.

That scandal has led Beijing to hold numerous briefings to say it was looking into the matter and temporarily close the hospital at the center of the case. Now in one of the first major national moves to address this kind of rampant misrepresentation, China’s commerce regulator has just said it is launching a 6 month campaign to enhance supervision of online marketplaces.

In another crackdown that looks possibly related to the Baidu case, China’s anti-trust regulator said it intends to launch a systematic, large-scale investigation into pricing used by both Chinese and foreign drug makers. The last crackdown looks related to another issue that’s close to Beijing’s heart, namely national security. That instance has seen a number of domestic cloud service providers close down over concerns about sensitive content being hosted on their servers.

Let’s begin 2016 crackdown season launch story with the State Administration for Industry and Commerce (SAIC), which posted a fairly detailed note on its website explaining the objectives for its 6 month cleanup campaign of online marketplaces. (English article; Chinese article) Those objectives are quite broad ranging, and cover everything from scrutiny of product quality, operating licenses and trademark violations.

Anti-Trust Probe

The second crackdown in the drug sector also looks partly related to the Baidu case, though it’s quite possible this particular plan was already in the works before the scandal broke last week. That will see the National Development and Reform Commission (NDRC), one of China’s main anti-trust regulators, collect information on whether any drug makers violated anti-competition rules. (English article)

The final crackdown appears to be the work of one of China’s government censors, and has seen domestic cloud service providers Vdisk, KuaiPai and UC net disk all suddenly shutter their services to comply with government regulations. (English article) Those names may not sound too major, but they’re actually backed by the much better-known trio of Sina (Nasdaq: SINA), Xunlei (Nasdaq: XNET) and Alibaba (NYSE: BABA), respectively.

It appears that all 3 of the companies being closed were offering free hosting services, and the reports indicate their main transgression may have been hosting pornographic material. The move doesn’t appear to affect the larger and more important corporate cloud hosting services that many Chinese companies like Alibaba and foreigners like Amazon (Nasdaq: AMZN) see as having big potential in China.

Only the first crackdown by the SAIC seems directly related to the Baidu case, and is also likely to have the biggest impact in the online space. The drug case looks similar to a series of probes targeted mostly at foreign drug makers a few summers ago, and the cloud case looks much like many of the pornography cleanups we see periodically. At the end of the day Baidu is likely to be the biggest victim of this cleanup due to its involvement in the cancer scandal, and this broader flurry of activity hints that we could be looking at an active crackdown season in the summer ahead.

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