Dispute with hospital group may dent Baidu revenues

Baidu Inc's revenue stands to take a hit amid a standoff between the company, which is China's dominant search-engine operator, and a key advertiser－the nation's largest group of private hospitals.

The Putian (China) Health Industry Chamber of Commerce, an association of 8,500 private hospitals, urged its members to stop advertising on Baidu starting last weekend. The move followed Baidu's crackdown on what it said was false healthcare information in ads posted on its site.

The Beijing-based Baidu said in late March that it rejected ad requests last year from more than 7,800 hospitals affiliated with the Putian association.

The healthcare ad market is "a long-term driver of revenues" for Baidu, co-founder and Chairman Robin Li said during the 2014 fourth-quarter earnings conference call.

But in response to Putian's boycott, Baidu said in a statement on one of its official micro blogs on Saturday that it will not cooperate with private hospitals that provide fake healthcare information on Baidu. It said that "high entry barriers and strict auditing are its long-term business principles".

Analysts said that neither Baidu nor Putian can be a clear winner in the dispute, but the hospital association may be hit harder, given Baidu's at least 70 percent share of the search segment.

"I expect that we will see a resolution of this, because neither party wins from the cessation of any business dealings," said Neil Flynn, portfolio manager at Alcuin Asset Management, which specializes in United States-listed Chinese Internet companies. Baidu trades on the Nasdaq.

Baidu does not break out the contribution of healthcare ads to its revenue, but Flynn estimated that such ads generate more than 30 percent of Baidu's advertising revenue.

He said the effect of the standoff with Putian would be about 3 percent to 6 percent of revenue.

The developer of an app to promote plastic surgery hospitals in China said that it costs too much to run ads on Baidu's search platform.

"Most of the hospitals (that advertise) are essentially working for Baidu, because the company charges by the click for advertisers." The developer, who asked to remain anonymous, said that for some hospitals, each click could cost 500 yuan ($81).

Lu Zhenwang, an independent Internet expert and chief executive officer of the Shanghai-based Wanqing Consultancy, said that private hospitals do not have the same reputation and resources as government-funded hospitals.

"Marketing is what keeps the private hospitals alive in China. Putian's hospitals can work with other search engines, such as Sogou (a subsidiary of Sohu.com Inc), but they simply cannot offer the search traffic that Baidu does," he said.

Media reports on Monday said that fewer than 10 percent of Putian's members had stopped online advertising on Baidu.

The Putian chamber declined to comment. In an announcement over the weekend, it said that the decision "to cease cooperation with Baidu may affect members' business in the short term".