Baidu's Blows Could Be Google's Gold

Just weeks after being linked to a scandal over tainted milk that killed four infants and sickened thousands in China, Chinese search engine giant Baidu has been hit with more bad news.

Shares of Baidu plummeted Monday after China Central Television, China's state-run television network, reported that the company had sold links to unlicensed medical sites with uncorroborated claims about their products.

The report is eerily familiar to allegations made last month that Baidu had sold advertising to Chinese dairy company Sanlu, whose products were at the center of the country's tainted milk scandal, in exchange for consistently blocking negative reports about Sanlu.

Baidu's stock was down 7.3 percent to US$125 per share in late trading on the Nasdaq National Market on the latest news.

Opportunity for Google?

Baidu dominates the search advertising market in China with as much as 70 percent market share. Google (Nasdaq: GOOG) has about 22 percent market share in China, according to a research note from William Blair & Company equity analyst Troy Mastin.

Its position as the underdog is an unfamiliar one for Google, which controls as much as 70 percent of the search advertising market in the U.S. Struggling Internet portal Yahoo (Nasdaq: YHOO) is second with about 20 percent, and Microsoft (Nasdaq: MSFT) is a distant third with between 8 percent and 10 percent.

Could the damage to Baidu's reputation give Google a new opportunity to strengthen its position in the Chinese search advertising market?

"It's possible that it will," Mastin told the E-Commerce Times. "The concern would be that Chinese consumers will view Baidu's results as less pure than Google's, or more censored or more altered."

Hard Market to Crack

Despite its unquestioned dominance in the U.S. and Europe, Google has struggled to make much headway against Baidu in China.

"Historically, Google was at a disadvantage because they didn't have actual operations in China," Mastin said. "They kept their servers and technology out of China, so their performance was below other search engines there."

The search engine powerhouse refused to set up operations in China on several grounds -- the chief one being that it did not want its search results to be censored by the authoritarian government in China, said Mastin.

Google eventually relented, however.

"In 2006, Google made the decision they would operate there and created a search engine in China at a .cn address and saw their performance improve," Mastin said. "Google agreed to go by the censorship protocols that the Chinese government requires."