INTERNET: Baidu, Real Estate Site Spar Over ‘Protection Fees’

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Bottom line: New revelations about Baidu’s fees for endorsing certain companies and including them in special zones on its website are the result of a business dispute and are unlikely to attract major attention from China’s Internet regulators.

Sofang protests Baidu fees

Just as Baidu (Nasdaq: BIDU) starts to recover from a major scandal involving misleading online search results, the Internet giant is coming under attack for similar tactics from a major online real estate services firm called Sofang.com. In this case Sofang’s move looks somewhat opportunistic, taking advantage of the earlier recent scandal to draw attention to another one of Baidu’s less-than-transparent practices involving fees for special treatment on its various websites.

Sofang is being quite savvy by referring to the fees it pays for Baidu’s endorsement and inclusion in special industry-specific areas of its website as “protection” fees, evoking images of a mafia strongman extorting money from powerless small business owners. Baidu has countered with its own savvy response, questioning whether a search engine and its other websites can or should be held responsible for the life or death of another company.

Before we continue, we should clarify that Sofang is different from the New York-listed SouFun (NYSE: SFUN), and similarity between the 2 companies’ Chinese names has led to a long-running string of trademark disputes. In this case that background is significant, since Sofang President Li Zhong’s complaint implies the rival SouFun is getting preferential treatment on Baidu’s sites because it is willing to pay more.

This latest clash comes just 3 weeks after Baidu landed at the center of a much larger scandal involving its system that sells top spots in its search results to the highest bidder without informing web users. That case saw a young man with cancer select a hospital for treatment partly based on its high ranking in an Baidu search, only to learn later the hospital got such placement simply because it paid the highest price.

Since then Baidu has been ordered to clean up its search results and make them more transparent, and it now labels sponsored results as advertisements. But according to Sofang, Baidu also engages in a number of other pay-to-play tactics by collecting fees from companies for inclusion on its other websites.

‘Protection Fees’

Li Zhong said he was issuing his open letter to Baidu chief Robin Li due to unfair treatment and failure of a lawsuit to address his grievances. (Chinese article) He says that Baidu engages in practices such as issuing “verified” or “V” status, the equivalent of a Baidu endorsement, to companies that are willing to pay for such a labeling. He also detailed a fee of more than 25 million yuan ($3.8 million) that he says his company has to pay for inclusion in Baidu’s special “brand zone”. Li concludes his message by saying he won’t pay such “protection” money anymore.

Baidu hasn’t directly addressed Sofang’s specific complaints, but instead issued its own response saying that survival of a business should depend on its own efforts and not rely on a third-party site like Baidu. (Chinese article) Baidu adds that many of its non-search services, which presumably means things like “V” status and “brand zones”, are provided simply as a convenience for web surfers.

The nature of the Baidu’s response seems to show it’s not too worried about a new scandal this time, and indeed this particular matter looks less serious since it involves a business dispute rather than consumer complaint. At the end of the day, Baidu really should disclose when it gives endorsements to companies that pay and includes them in special zones on its websites. But that issue seems less important than misleading search results, and I doubt the regulators will step in to mediate this particular matter.

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