Bottom line: Baidu may never recover the medical advertising business it lost during a recent spat with a major hospital group, putting pressure on its stock as its revenue growth takes a hit over the next few quarters.
A spat between leading search engine Baidu (Nasdaq: BIDU) and one of its largest advertisers is taking a toll on the company’s stock, and also casting an illuminating spotlight on the nature of the advertising market in China. If the latest reports are correct, the boycott by members of the Putian Healthcare Industry Chamber of Commerce could be costing Baidu millions of dollars in lost ad revenue each day, underscoring the importance of such advertisers.
The tussle also reflects the strange nature of China’s advertising market, where ads making inflated claims are quite common. Many outsiders may also find it strange that hospitals are such an important source of advertising revenue in China, since such ads are far less common in more developed markets. The bottom line is that exaggerated ads and strange advertisers are the norm in China, but such revenue sources for companies like Baidu could shrink as the market starts to mature and more closely resemble the west.
I previously wrote about the boycott when the stand-off broke out 2 weeks ago (previous post), and now it looks like Baidu’s shares are emerging as one of the biggest victims. Baidu’s stock has lost about 6 percent over the last 3 weeks, wiping out more than $4 billion market value. That said, we should also note that the shares are still about 30 percent higher than their level a year ago, after they soared during a massive rally last year for Chinese Internet stocks.
The Putian association that launched the boycott represents a hefty 80 percent of China’s 12,000 private hospitals, which are some of Baidu’s biggest advertisers. That’s because China’s rapid transition from a state-owned to a more commercial-oriented healthcare system has created a state of stiff competition where hospitals are vying with one another for limited consumer dollars.
The Putian association recommended that its members stop advertising on Baidu due to the search engine’s high prices, and the group met on April 4 and apparently formalized the decision. Baidu countered by saying that it had been cracking down on medical advertisements making false medical claims, a decision that affected and upset many of Putian’s members.
A new report on the situation cites several research notes that try to quantify the impact of the Putian association’s move. (English article) One estimates the association’s members account for 15 percent of Baidu’s search revenue, which would translate to a hefty $330 million each quarter, based on the $2.2 billion in online marketing revenue in Baidu’s latest quarterly report. Another analyst cut his second-quarter sales forecast for Baidu by about 3 percent due to the stand-off.
The 15 percent figure looks a bit high to me, and I suspect the 3 percent figure is a bit closer to the truth. But that would still represent more than $60 million in quarterly revenue, translating to $2 million in lost revenue each day. It’s far from clear if this revenue will ever return, since other search engines run by Qihoo 360 (NYSE: QIHU) and Sohu (Nasdaq: SOHU) could bid aggressively for the business.
Some may see this as a negative for Baidu, but I would actually call it a small positive because it will improve the health of the company’s longer term business. That’s because these false and exaggerated ads really don’t belong on the Internet at all, and are probably destined to disappear as the medical industry matures. Still, in the shorter term the loss of this important revenue source could cause a sharp slowdown in Baidu’s growth, which could put some pressure on its stock for the next couple of quarters.