Bottom line: Baidu will suffer more damage to its revenue and profits after new actions by China’s Cyberspace Administration, creating a potential opportunity for Bing or even Yahoo in China’s lucrative search market.
The woes for Internet search giant Baidu (Nasdaq: BIDU) continue, with word that China’s Internet censor is ordering the already hobbled company to cleanse itself of inappropriate sites in its search results. But whereas previous crackdowns have focused on politically sensitive content, this latest crackdown focuses on sites of companies that may be engaged in fraud or making inflated or bogus claims. The entire situation looks set to make a major dent in Baidu’s growth story, and could even see the company’s revenue shrink as it finds a new equilibrium.
Equally intriguing is the question of what other search engines might be able to capitalize on Baidu’s woes. One group that immediately comes to mind are domestic search engines 360 Search and Sougou, the current second and third-largest players, backed by Qihoo 360 (NYSE: QIHU) and Sohu (Nasdaq: SOHU), respectively. But this pair probably plays by the same rules as Baidu, and thus may have to make similar changes that would undermine their credibility and traffic volume.
Instead, this setback looks like a golden opportunity for foreign search engines, which enjoy a far better reputation for transparency and fraud fighting in their search results. The only problem is that 2 of the world’s top players, Google (Nasdaq: GOOG) and Yahoo (Nasdaq: YHOO), have withdrawn from the market. Both offer Chinese-language sites based in Hong Kong, but each of those is blocked in China. Meantime, the only one operating a legal site in China is Microsoft’s (Nasdaq: MSFT) Bing.
We’ll return to the question of possible beneficiaries of Baidu’s woes shortly, but first let’s review the chain of events that got us to this point. It all began last month when a scandal erupted over a young cancer patient who chose his treatment partly based on its high ranking in a Baidu search result. The patent later died, but not before writing an extensive online post complaining of deception because the treatment he chose received its high ranking simply because it paid the most money to Baidu.
The uproar that followed prompted several regulators that oversee China’s Internet to call for more transparency in declaring which results on Baidu’s pages are paid, and also to lower the volume of paid advertising on its search results. That led Baidu to sharply pare back its earlier revenue forecast for this year’s second quarter, and translated to $1.3 billion in lost annual revenue based on my calculations using 2015 revenue figures. (previous post)
I already predicted the impact could be even bigger, since the scandal and Baidu’s corrective actions didn’t take place until mid-May, or halfway through the second quarter. Now the latest call for more corrective action by the Cyberspace Administration of China looks set to deal a further blow to Baidu. Under its latest ruling, the administration says that all search engines will be required to report banned content and verify advertisers’ qualifications beginning August 1. (English article)
These new rules look even more aggressive than earlier ones, which simply forced Baidu to be more transparent about its paid advertising and limit advertisements in its search results. It’s also significant that the Cyberspace Administration is getting involved, as this is one of China’s toughest Internet regulators and is much better known for blocking content on politically sensitive topics rather than targeting business fraud that’s rampant in China.
All of this brings us back to our original question of who, if anyone, might benefit from Baidu’s woes. As I’ve already said, the drive is likely to hurt both Sogou and 360 Search as well, as each will need to clean up its site of similar practices or risk angering China’s many Internet regulators. Bing looks like the best positioned to benefit, though it’s currently a non-player in China and doesn’t seem very marketing savvy.
That raises the question of whether Google or Yahoo might decide to mount a bid to re-enter the market, since both already have the necessary resources and launching a site would simply require registering a company in China. Google is currently working hard to re-enter China’s smartphone and app store markets, following its withdrawal from the search market in 2010 after a high-profile tussle with Beijing over self-censorship. A decision to re-enter China’s search market might look a bit hypocritical at this point, and thus Google seems unlikely to re-enter just now.
Instead, a more intriguing possibility might see Yahoo perhaps make a new play for China, perhaps with longtime partner Alibaba (NYSE: BABA). The pair actually formed a search partnership centered on Yahoo’s original China site more than a decade ago. But Alibaba wasn’t able to revive the site’s falling fortunes, and now visits to yahoo.cn simply re-direct users to Yahoo’s Singapore site. Of course a move to relaunch the China site would be risky and might draw western criticism over self-censorship. But Yahoo is hurting so badly right now that anything it could do to stop its slide might be welcome by investors.
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