INTERNET: Major Hospital Group Takes On Baidu

Bottom line: A rebellion by a major hospital group against Baidu could reflect growing discontent towards the search engine among Chinese advertisers, which could force it to lower prices and make its business practices more transparent.

Medical group takes on Baidu

Local media are swarming to a story that has seen a major hospital association advise its members to yank their advertisements from Baidu (Nasdaq: BIDU), cutting off a top cash cow for China’s leading search engine. The Putian Healthcare Industry Chamber of Commerce is saying the grievances that led to its action are related to the high prices that Baidu charges for its services. But Baidu has weighed in with its own view, calling the move retaliatory for its own refusal to accept ads containing false and exaggerated claims from many Putian members.

I can add my own personal view that many of Baidu’s advertisers may be turned off by the company’s business practices that are quite opaque compared to global peers like Google (Nasdaq: GOOG) and Yahoo (Nasdaq: YHOO). I would also add that Baidu’s search engine is one of my least favorite to use because its results are so cluttered with content that is obviously self-promotional and paid for by advertisers, even though it is China’s leading search engine.

Baidu also charges extremely high rates for its services, which has helped to make the company quite profitable but is perhaps also what’s leading some big advertisers like Putian’s members to rethink their partnerships with the company. According to the latest reports, which cite an internal document, Putian Healthcare has recommended that all of its hospitals halt their online advertising as of April 1. (English article; Chinese article) The advice is voluntary and Baidu isn’t mentioned specifically, and the association said it will hold a meeting on April 4 to further discuss the matter.

The memo specifically cites high prices charged by some online advertising sites, saying such prices are posing a serious challenge for the industry. Hospitals and other medical-related service providers are some of China’s most aggressive advertisers, as they seek business in an emerging age of more commercially-focused hospitals and clinics. Their aggressive advertising often leads to accusations of false and misleading claims, and stiff competition has led to scandals like the one in 2013 that saw British drug maker GlaxoSmithKline (London: GSK) fined heavily for bribing hospitals to buy its products.

Media are focusing on this particular case with Putian because the association is one of China’s leading groups representing a fast-growing field of private hospitals and clinics. The association is based in the city of Putian in Fujian province, but the reports say its members account for a hefty 80 percent of the nearly 12,000 private hospitals throughout China. The reports say that many hospitals typically spend around 60 percent of their marketing budgets in online search advertising, a market currently dominated by Baidu.

The search giant has responded to the reports with a statement on its microblog, insinuating that Putian’s move may be retaliatory. That’s because Baidu said it has lately begun refusing to post false or misleading ads from many medical companies, and its statement says that up to 60 percent of those rejected are members of the Putian association. (Chinese article)

Investors didn’t seem too worried about the news, with Baidu shares down just over 1 percent in the latest trading session. But an unrelated scandal involving e-commerce leader Alibaba (NYSE: BABA) also started on a quiet note in January, before quickly mushrooming into a major affair that ultimately saw the company’s stock drop 20 percent.

I do suspect there’s a growing resentment at Baidu’s high prices and other manipulative ways among advertisers, and that Putian’s case could be the start of a broader trend. Accordingly, Baidu could be looking at growing resistance from its advertisers in the year ahead, especially as China’s economy slows, which could ultimately force it to lower prices and clean up some of its less transparent business practices.

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