Baidu shares fell 2.35% to $203.60 on Monday as an association of private hospitals in China said that its members had stopped advertising on Baidu effective April 5th. Investors fear that the conflict between private hospitals and the search engine giant may hurt Baidu’s revenue. Medical advertising accounts for about 30% of the Beijing-based company’s ad revenue.
Baidu cracks down on ads with false healthcare information
Putian Healthcare Industry Chamber of Commerce represents about 80% of China’s private hospitals. Putian accuses Baidu of charging too much for medical advertising. The search engine giant signs master contracts with private hospitals every year and urges them to hike their ad spending by 30%-40%. Hospitals find it difficult to keep increasing their ad spending at that rate year after year.
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But Baidu says it is taking strict measures to crack down on “false healthcare information” in medical ads posted on its site. Last year, the company rejected ad requests from about 7,800 private hospitals, most of them affiliated with Putian. Quoting 86Research Ltd, Belinda Cao of Bloomberg says that each week of advertising boycott by Putian will lead to 1% sales loss for Baidu.
Baidu’s short-term loss, long-term gain
Juan Lin, an analyst at 86Research, said that the boycott is unlikely to last more than a few weeks. The Chinese search engine giant will hold discussions with Putian members on Tuesday. But Baidu is unlikely to cooperate with any private hospital that provides fake healthcare information in ads. On Monday, Stifel Nicolaus analyst George Askew slashed his sales estimate for Baidu from Q2, 2015 by as much as 3%. Stifel has a Hold rating on the stock.
Baidu’s efforts to crack down on false advertising and private hospitals’ boycott may hurt its revenue in the near-term. But the company is likely to benefit in the long-run as it establishes greater trust with users. Eliminating ads of illegal medical services from its search results will improve the user experience on Baidu’s site. High quality ads would improve the effectiveness of Baidu’s search site and lead to a higher return on investment.