China's Baidu.com fights to rescue reputation

BEIJING - Baidu.com has been the star of China's Internet world. But now the search engine dubbed "China's Google" is scrambling to rescue its reputation after state TV accused it of letting unlicensed suppliers of medical products pay for higher rankings on its results page — without alerting users.

Baidu.com Inc.'s U.S. shares have plunged this week, including a 30 percent drop Monday, since the weekend TV report. Baidu says it has suspended thousands of merchants from its paid-search service but says it broke no law.

It is a big setback for Baidu, which enjoyed a long winning streak after its 2002 launch, with profits up 91 percent in the latest quarter and a 60 percent market share, far ahead of Google Inc.'s Chinese site. The new accusations are explosive at a time of public outrage in China over a string of deaths blamed on tainted milk, shoddy medicines and other faulty products.

"There's a very low tolerance for anyone that seems to be involved in exposing consumers to health risks in China," said Citigroup analyst Jason Brueschke.

CEO Robin Li said Baidu is trying to reassure users by requiring customers selling medical, beauty and health food products to show they are licensed in their fields before they can return to the paid-search service. But he stressed that was not required by law and said search engines could not be expected to vouch for information on the Internet.

"We are doing this because we care. It is important to us. We want to be a responsible corporate citizen," Li said Wednesday in a conference call with financial analysts. Still, he said, "if I had to speculate, our traffic will be negatively affected in the short term."

Little-known outside China, Baidu — pronounced "by doo" — is one of the world's most-visited Web sites because of its dominance among China's vast population of 253 million Internet users, who celebrate a Chinese company that has faced down foreign rivals to become a leader.

Over the weekend, however, China Central Television said Baidu's paid-search service, which lets Web sites pay to be listed higher among search results, allowed links to unlicensed companies that offered medical products or services. CCTV said the sites sold treatments for cancer, sexually transmitted diseases and other ailments.

Some comments on Chinese Web sites criticized Baidu, with one saying, "the insiders are helping fraud!" But others argued that rival search engines did the same thing and said Chinese Web surfers should support Baidu.

Google and other Chinese search engines do offer such paid-search services. But a key issue is whether Baidu makes clear which Web sites pay to be shown at the top of the results.

Google and Baidu's Chinese rivals show paid listings in a separate box, while Baidu lists all results together, with the word "promotion" in small Chinese characters at the end of sponsored items.

"One of the things CCTV has implicitly said is that because Baidu does not clearly differentiate between what is sponsored and what is natural, the consumer runs the risk of being confused," Brueschke said. "If there is a muddling of that distinction, has Baidu somehow contributed to consumers' purchasing products that harmed them?"

Some users complain that Baidu carries so many paid items that the first page of results for some searches is entirely promotions.

Li, the CEO, said Baidu plans to change its display to make sure results are clearly labeled.

"We thought it was clear," he said. "But we do hear from the media from time to time that they are confused about paid and non-paid results. So we are working on a better system to address this issue."

Baidu's reputation has taken other hits recently.

Web sites were full of accusations in September that Baidu was paid to suppress information on tainted milk. Baidu responded that Sanlu Group, the dairy at the center of China's milk scandal, had asked Baidu to exclude bad news about Sanlu from search results, but Baidu said it rejected the request.

"Baidu respects the truth and their search results reflect that commitment," said a company statement.

Li also has denied claims that Baidu excluded Web sites from search results if their operators failed to pay. And Baidu has been sued by music industry groups that say Baidu's music-searching service links to Web sites that carry pirated material.

"There is an image problem but it doesn't have to be terminal," said Duncan Clark, managing director of BDA China Ltd., a technology consulting firm. "If they mishandle this it could be a real problem."

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