Bottom line: Baidu’s anti-competitive behavior alleged in a lawsuit by Jinri Toutiao won’t have a long-term effect on its stock, but will draw the attention of an increasingly assertive anti-trust regulator.
A humorous war of words has broken out between search leader Baidu (Nasdaq: BIDU) and news aggregating app Jinri Toutiao, also sometimes called Today’s Headlines, over unfair competition in the form of search manipulation. I’ll detail the allegations shortly. But on a more serious note, this particular lawsuit does raise the question of whether a search engine like Baidu is obliged to be objective in its results. Moreover, it could also open the company to allegations of abusing its market-leading position with anti-competitive actions.
This kind of monopoly-like position has become a growing issue on China’s Internet, which has recently shed the notion of being too small for antitrust treatment. The original BAT of Baidu, Alibaba (NYSE: BABA) and Tencent (HKEx: 700) all now hold positions in search, e-commerce and games, respectively, that are quite lucrative and might be considered monopolies in many other markets. I personally would consider all three monopolies in China in terms of their ability to dominate their respective markets, and I suspect the regulator may someday attempt to challenge them the way that Google (Nasdaq: GOOG) and Facebook (Nasdaq: FB) are now getting challenged in the rest of the world.
We’ll return to the bigger issues shortly, but first let’s zoom in on the latest headlines on Jinri Toutiao, something of a superstar on China’s unicorn scene, which last summer conducted a mega fund-raising that reportedly valued it at more than $20 billion. (English article) I should disclose here that I blogged for Toutiao at one point in the past, but its bread-and-butter is its third-party news aggregation app that is quite popular among average Chinese.
In its lawsuit filed in Beijing, Toutiao accuses Baidu of manipulating its search service to return unfavorable results when people search on Toutiao’s name. (English article) According to one report, Toutiao says that searches on its name return a month-old negative article on Toutiao being ordered to reform as the top item. The second result is a link to Toutiao’s own page, but also includes a warning in red saying the link may be unstable.
I ran my own test on Baidu’s search results this morning, and everything looked normal, with no appearance by the negative article or any warning in red. The first two items on the page were linked to Toutiao and its app, followed by an entry on Toutiao in Baidu’s equivalent of Wikipedia, which is pretty standard fare. That was followed by a series of the latest articles on the company, all focused on this latest battle between it and Baidu.
Baidu has put out a lengthy statement addressing Toutiao’s points, but basically says it has done nothing wrong and it can’t be held responsible if its algorithms produce negative articles about a name being searched. I obviously can’t comment on the validity of the lawsuit, but should point out that this kind of practice is quite par for the course in China’s Internet. Even Tencent, which I consider the most upright of the China Internet bunch, has reportedly engaged in this kind of spat in the past through, for example, actions like blocking its content from being indexed by others.
Obviously in a truly free market this kind of behavior should be completely allowable, since the owner of a site can post whatever he wants or restrict his content. But when someone attains a monopoly-like position like Baidu’s, there usually come accompanying responsibilities to be fair and open or risk being accused of abuse of power. Baidu actually landed at the center of a similar scandal nearly two years ago, when it was accused of placing paid ads at the top of its search results with little or no disclosure of their paid nature.
Baidu shares took a bit of a beating in the latest session on Wall Street, shedding nearly 4 percent. It’s worth noting that Alibaba and Tencent posted smaller losses of 1 percent, amid a broader sell-off. As to whether this will blow up into another scandal like the one two years ago, I doubt that will be the case. But this is almost certain to catch Beijing’s attention, and I wouldn’t be surprised if this increasingly assertive regulator decides to take on one or more of China’s top internet companies in the year ahead for anti-competitive behavior.