Baidu to Restrict Sponsored Search Results After China's Probe

Baidu Inc. said it will restrict the number of sponsored posts to 30 percent of a results page and establish a 1 billion yuan ($154 million) fund to fight fraud after the death of a student led to a government review of its operations.

China’s biggest Internet search engine company is responding to a statement by the Cyberspace Administration of China, which said on Monday that its search results misled users and the company must make it clear when posts have been paid for. Baidu must also review its medical advertising to clear up those that don’t comply with new standards.

The regulator launched an investigation after the death of Wei Zexi, a 21-year-old computer science major, who sought out a controversial treatment advertised among search results.

“We accept and support the investigation team’s decision and will put these rectification requirements in place at the soonest,” Tracy Hu, a spokeswoman for Baidu, said in the statement. “We will continue to uphold extremely high standards to make our platform safe and trustworthy.”

The move has the potential to hurt a key source of revenue and profits for Baidu. Health-care ads account for 20 percent to 25 percent of Baidu’s search revenue, including that from the pharmaceutical industry to medical devices, estimates Karen Chan, an analyst with Jefferies Hong Kong Ltd.

Baidu’s shares plunged the most in nine months on May 2 after the Cyberspace Administration, the national health commission and the top industry regulator announced they would dispatch a team of investigators following Wei’s death.

“There is a revenue implication for Baidu because if you’re a company and you’re looking at your search results being pushed off to the sides maybe you’re not going to be willing to pay as much,” said Kirk Boodry, an analyst at New Street Research. “Health care as a segment is the largest for Baidu so it is material.”

Baidu pledged to abide by the rulings of the administration and said the 1 billion yuan fund would compensate users for losses caused by fraudulent advertising.

To contact the reporter on this story: David Ramli in Hong Kong at dramli1@bloomberg.net. To contact the editors responsible for this story: Robert Fenner at rfenner@bloomberg.net, Phani Varahabhotla