Baidu Inc (ADR) Faces Another Regulatory Probe Over Illegal Gambling

The incident is likely to affect Baidu's second-quarter results.

Baidu Inc (ADR) Faces Another Regulatory Probe Over Illegal Gambling

By: Abdullah Saeed Qureshi Published:

The incident is likely to affect Baidu’s second-quarter results

The Chinese Internet giant, Baidu Inc (NASDAQ:BIDU) faces a new regulatory probe after the Chinese internet watchdog received complaints against the company of promoting illegal activities on its platforms. On Monday, reports from Chinese media claimed that Baidu is involved in providing a platform to promote illegal gambling websites.

China’s internet regulator Cyber Administration of China (CAC) said in an official statement released on Monday: “We will conduct a strict investigation and handle any illegal behavior accordingly.” Gambling in the world’s second largest economy is prohibited since 1949, however, state lottery does operate in the country.

Baidu, on the other hand, has asserted that the allegations are not true and that the company is participating in the investigation and is actively assisting Chinese police officials. The Chinese state media released a report claiming that law enforcement agencies found Baidu’s employees helping illegal gambling websites use its search engine to promote their businesses and also making huge profits from the activity.

This is not the first time the Chinese search giant has come under a regulatory probe. Last month, the company was also punished by CAC due to a death of a 21 year old Chinese student.

Wei Zexi, a local college student suffering from a rare form of tissue cancer died using medical treatment from one of the sponsored links on Baidu’s online portal. Following the incident, the Chinese regulatory authorities also placed restrictions on the quantity of medical ads placed on Baidu’s search engine.

As a result, the company also had to reduce its revenue guidance for the second quarter, as most of its revenue comes from online advertising. The Chinese Internet giant expects its “2Q revenue to be between $2.807 billion (18.100 billion yuan) and $2.823 billion (18.200 billion yuan), when compared to the previous revenue guidance of $3.119 billion (20.110 billion) to $3.192 billion (20.580 billion).”

Baidu, which is China’s largest search engine with over 80% market share, said that almost 96% of its total revenue last year came from online advertising. However, the decline is imminent this year. Previously, users have criticized the company for promoting and placing paid ads on its online portal, which are mostly misleading and are not labeled clearly.

Baidu said: “We have assured authorities and users to cut the number of sponsored links on its website, which will drive down revenues in the short term, but enhance user experience.” The Chinese regulatory authorities have also taken strict measures to ensure users’ safety and eliminate misleading practices.

With respect to the current investigation, CAC has ordered Baidu and all other search engines to refrain from providing platforms to promote illegal activities such as gambling. Similarly, the regulatory authority has also ordered the companies to avoid placing illegal and unauthentic information on their search engines.

Online gambling in China witnessed a surge during the recent UFEA Euro football tournament held in France. China’s law enforcement agencies have been active since then and have carried out million dollars busts during the period. The Chinese government also ordered the country’s tech companies to ensure that such activities are not carried out on their social platforms including smartphones apps and websites.

For Baidu, it is important to restrict such activities on its online platforms. The company has already reduced its revenue guidance for the second quarter and this incident will further deteriorate the company’s earnings results. Baidu stock was down 1.27% at $164.79 during pre-market hours.