Baidu in spotlight over ad scandal

A smartphone with an Android operating system and the Baidu Browser application is seen in this picture illustration taken February 22, 2016. [Photo/Agencies]

One of the largest sources of internet giant Baidu Inc's revenue has been put under threat as a government investigation looks into the company's search business after the death of a cancer-stricken college student.

Officials from the Cyberspace Administration of China, the National Health and Family Planning Commission and the State Administration for Industry and Commerce－the regulator of online advertising, launched a joint probe on Monday after the 21-year-old Wei Zexi sought out a controversial treatment advertised among Baidu's search results.

But the procedure failed to save Wei's life. He called the treatment useless and criticized Baidu's paid listing practice in online posts before he died last month.

His experience triggered an online outcry in China, a country that has witnessed numerous scandals of medical-related advertisements on Baidu since 2008, when China Central Television found that the search giant advertised unqualified drug producers.

The share price of the Nasdaq-listed Baidu fell by 7.92 percent, the most in nine months, after the investigation was announced on Monday.

Tian Hou, an analyst at TH Capital in Beijing, said the investigation will certainly slow down Baidu's business in the short term, as medical-related advertisements account for about 30 percent of the company's revenue.

"An investigation can last for months, during which Baidu is expected to be very cautious about doing business with medical-related advertisers," she said.

Despite the public's criticism of the business model of paid listing, Hou said it is the advertiser that causes the problems rather than the model itself. "The business models of Baidu and Google Inc are essentially the same. It is a sound business model. The problem is how to prevent unqualified medical institutions from advertising online," she said.

Bloomberg contributed to this story.