The Chinese search engine, Baidu, said it will restrict the number of sponsored search results to 30 percept of a results page in order to fight fraud after the death of student led the government to review its operations. In addition, it will establish a $154 million fund to help fight fraud among sponsored search results. The Cyberspace Administration of China has accused Baidu stating that its search results misled users and the company must make it clear when posts have been paid for. Baidu must also review its current advertising to eliminate medical advertising that does not comply with the new standards. This investigation arose after the death of Wei Lexi, a 21 year old student, who died after seeking a controversial medical treatment found among Baidu sponsored search results. According to Baidu, the search engine will enact new restrictions and requirements in order to uphold the safety and trustworthiness of their platform.
However, the new requirements and restrictions have the potential to hurt a key source of revenue and profits for the search engine. Health care advertisements account for roughly around 20 percept to 30 percept of Baidu’s revenue. Limiting these advertising would drastically hurt Baidu’s revenue. In addition, Baidu’s shares saw the largest plunge in recent history after the Cyberspace Administration announced that they wold begin an investigation following the death of Wei Lexi. These implications are massive for Baidu which wants to maximize profits but at the same time it also wants to look after its user’s welfare. The search engine will use the $154 million dollar fund to help compensate victims of fraudulent advertising.
The potential drop in Baidu’s revenue is due to companies not being as willing to pay for sponsored search results if they are being pushed to the side. As we have learned in class sponsored search works by potential buyers placing bids for spots on the search results. If the new restrictions on advertisements are too demanding for potential buyers then they will be less willing to place bids on advertising spots. Since these potential buyers will not bid as much as before then the other bidders will also lower their bids since there would be less competition for higher spots. As a result, the overall revenue that the search engine gets from these sponsored search results would greatly decrease. This results in the debate of how companies should pursue profit maximization while also taking into consideration the well being and interest of their consumers.