CCTV Attacks Baidu, Again

  • Posted by
  • on August 16th, 2011

Last night CCTV aired a 26 minute report critical of Baidu ($BIDU), its sales practices and its Phoenix Nest system for advertisers. Using undercover reporters posing as advertisers, CCTV showed Baidu employees in Hebei and Beijing helping companies with admittedly fake business licenses get approval to run ads. It was smart of CCTV to use more than one location, as that makes it much harder for Baidu to dismiss the problems as the work of “rogue” employees.

One firm with a fake license that Baidu was happy to help was a health supplement company, which is surprising given that a 2008 CCTV expose crushed Baidu stock and led the company to promise in a press release that:

“Baidu removed paid search listings of certain customers, particularly medical and pharmaceutical customers without licenses on file with Baidu. Baidu will allow these customers to resume access to Baidu’s P4P paid search platform once their relevant licenses are provided to and reviewed by Baidu.”

The report asserts that the Phoenix Nest advertising system is not nearly as transparent as Baidu claims and that the opacity may lead advertisers to overpay on a cost-per-click basis.

CCTV of course has an agenda, and there are several viable conspiracy theories behind this report. The 2008 expose of Baidu was basically a shakedown of the company. After Baidu bought 100m or so RMB in advertising around CCTV’s 2009 Spring Gala, CCTV left the firm alone. It is a bit early to be buying ads for the 2012 Spring Gala, but perhaps CCTV has a Q4 budget hole to fill.

An established competitor such as Tencent, Alibaba or Sohu ($SOHU) may have commissioned this report, as could one of the two startup, state-backed search engines (Jike and Panguso), neither of which have much hope of competing against Baidu without using “regulatory innovation”.

Since Google’s 2010 retreat, Baidu has become an effective monopoly in Internet search. It is unlikely the government is pleased with Baidu’s market power and the CCTV report may be a sign that Baidu should expect increased scrutiny and regulation.

The broadcast concludes with the narrator saying that Baidu has proven it can not be trusted to regulate itself and therefore given the importance of the Internet and search advertising the government needs to enact new laws and regulations to solve the issues raised in the report.

Regardless of the motivations behind the CCTV report, I think Baidu investors should be concerned for at least three reasons:

1. Baidu may be again forced to suspend medical related advertising, which could hurt Q3 results;

2. Advertisers who see this report may learn that they have been overpaying for ads on Baidu and will cut their cost-per-click rates, which could hurt Baidu’s revenue growth and margins;

3. New laws and regulations may have a negative impact on Baidu’s revenue and future growth.

The CCTV report is embedded below. It is streaming from China so may be a bit slow, and appears to be coded to start automatically.

[UPDATE: CCTV has created a minisite dedicated to “building trust on the Internet”, with most of the items so far attacking Baidu. Investors in Chinese Internet stocks should be wondering if Baidu is the only target of this CCTV campaign, or if other firms are next..END UPDATE]

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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