“I saw it on the internet, so it has to be true!”
You may laugh at that phrase, but China is trying to do something about it.
Internet advertising in the country will now be subject to increased regulations including checks against misleading and malicious ads, which will take effect September 1, 2016.
This could impact some of the largest internet companies in the county.
Chinese internet giants Baidu and Alibaba both rely heavily on advertising revenue. Baidu, a search engine like Google, has the highest exposure to the changed regulations, with 96% of its estimated revenue for 2016 coming from internet advertisements. Alibaba, the e-commerce company, relies on ads for 59% of its 2016 estimated revenue, and Weibo, the Twitter-like social media company, relies on ads for 87% of its revenue, according to data from Credit Suisse.
The regulations come in the wake of intense public outrage towards Baidu.
The search company came under fire after a 21-year-old student died from taking part in an experimental cancer treatment he found on the site. Baidu is being criticised for weighing advertisements higher than actual search results, though the company has told its employees to put “values before profits” going forward.
The new regulations are aimed to “protect the legitimate rights and interests of consumers, and promote the healthy development of the Internet advertising industry.” The law also focuses on healthcare, medicine, and food advertisements, and requires a review and approval process for ads in those categories.
Companies who deal heavily in online advertising, like Alibaba, Weibo and Baidu, are expected to hire new employees to keep up with the increased regulatory burden. The companies may also have to cut some of their ad offerings if they are too burdensome to maintain, according to Evan Zhou, an analyst at Credit Suisse, said in a note to clients.
“Search and listing service providers may exit certain high-risk ad categories,” Zhou said. “Financially, we expect a potential addition of 3% construction fee for cultural undertaking for the affected players.”
Zhou remains overweight on the sector, despite the new regulations, and shares of Alibaba, Weibo and Baidu were not negatively affected by the announcement of the regulations.