China’s regulators may force Baidu to be more like Google

China Central Television’s recent attacks on Baidu (Nasdaq: BIDU) may lead to new regulations that force China’s largest search engine to separate paid advertising from organic search results more clearly.

On August 15, 2011, CCTV aired a half-hour program exposing Baidu’s practice of ranking search results based on the amount paid to Baidu for a priority listing, instead of based on the relevance to the search terms used.

Undercover CCTV reporters also demonstrated how easily a fictitious company selling unlicensed weight-loss products could buy its way to the top of Baidu’s search results, all with the assistance of Baidu’s authorized sales and marketing agents.

This was not the first time that CCTV attacked Baidu for ethical lapses. In November 2008, the state-owned television network aired several news reports that highlighted Baidu’s practice of auctioning off top search results to the highest bidder, and of punishing companies that didn’t purchase priority placements buy removing links to their website from search results. The programs also showed that Baidu sold priority placement for certain key medical terms to fake hospitals and unlicensed medicine suppliers.

Even though nearly three years had elapsed between the programs, and Baidu had launched Phoenix Nest, a new online marketing system designed to improve relevance in paid search, the recent CCTV show explained that Baidu is still following the same old paid search business practices. It still allows unlicensed companies to buy their way to the top of the search results for key terms, CCTV claimed.

The program closed with an overt call for regulation, stating that it was clear Baidu was incapable of regulating itself.

Baidu’s practice of auctioning-off top search placements stands in sharp contrast to the Google (Nasdaq: GOOG) approach. As the selection quoted below from the founders’ letter in Google’s initial public offering prospectus states, Google decided long ago that their search results would be as good as they could make them.

Google users trust our systems to help them with important decisions: medical, financial and many others. Our search results are the best we know how to produce. They are unbiased and objective, and we do not accept payment for them or for inclusion or more frequent updating. We also display advertising, which we work hard to make relevant, and we label it clearly. This is similar to a well-run newspaper, where the advertisements are clear and the articles are not influenced by the advertisers’ payments. We believe it is important for everyone to have access to the best information and research, not only to the information people pay for you to see.

Commentators have pointed out the many possible motives that might lie behind CCTV’s reports on Baidu, ranging from the political, to the commercial, to journalists actually doing their job.

Whatever the motives, rumors do suggest that China’s Ministry of Industry and Information Technology may issue new online search regulations, including restrictions that would affect Baidu’s paid search rankings.

Deng Hongmin, Deputy Director of the Internet Safety Bureau at the Ministry of Public Security, confirmed during another Baidu-focused CCTV program aired on August 18, 2011, that several departments are currently revising relevant internet regulations. If those new rules are written, what might they look like?

One obvious regulatory solution to the Baidu paid search problem, as pointed out in several of CCTV’s programs, is to categorize the service as a form of advertising subject to China’s existing advertising regulatory regime. As risk factor number eleven in Baidu’s most recent annual report points out, paying for priority search placement is not currently classified as advertising under Chinese law, and thus Baidu (as the provider of the service) is not currently required to ensure that the content is fair and accurate or otherwise in compliance with applicable law.

For the advertising regulatory solution to work, however, paid search results and organic search results need to be differentiated. Otherwise Baidu might be placed in the impossible position of being held responsible for the content of every webpage that appears in its search results.

And that brings us to an interesting potential resolution: China’s regulators might force Baidu to segregate paid search advertising from organic search results, just like Google has been doing for years.

But how would the regulators determine if Baidu is complying with the new rules? Google faced a similar dilemma when it first entered the Chinese market and needed to learn how to censor its search results in order to comply with Chinese law. Since regulators wouldn’t tell them what information needed to be blocked, as described in Google’s February 2006 testimony before the U.S. House of Representative’s Committee on International Relations, Google analyzed searches that originated inside China’s “Great Firewall.” It then censored, from its own search results, any materials that China’s regulators themselves blocked.

Now those same regulators could consider reversing this process, by using Google’s Chinese language service to see what organic search results look like and comparing those with Baidu’s results to see if advertising links are clearly identified.

In 2010, Google ended its own challenging relationship with China’s internet regulators when it decided to stop censoring its search results to comply with Chinese law, and made a noisy exit from China’s search market.

Given this antagonistic history, an outcome where China’s regulators force Baidu to be more like Google, and perhaps used Google’s services to test Baidu’s compliance, would be an ironic twist worthy of a novelist.

Greg Pilarowski is the founder of a boutique international law firm focused upon the internet and digital media industries in China.

Photo: Julien Gong Min/Flickr.com