Baidu, Inc. (NASDAQ:BIDU), also known as the Google of China has had a slow fourth quarter because of tainted milk controversy.  The last quarter was the company’s first sales decline since they were listed on the NASDAQ in 2005.  Baidu.com was accused of managing the searhc results on behalf of milk company Sanlu.  Sanlu’s milk allegedly contained melamine thus poisoning and hospitalizing thousands of children.

Baidu denied the accusations but decided to remove the paid search advertisements of medical and pharmaceutical customers that have not filed for government licenses.  The removal of these links reduced sales by 5%.

Baidu’s fourth quarter sales were about RMB902.1 million ($132.2 million), up 58% from the previous year in the same quarter.  Baidu’s third quarter sales were RMB919.1 million.  This quarter, Baidu expects their sales to be between RMB780 million and RMB800 million.  Net profit for the fourth quarter was about RMB288.7 million, up from 31.3%.

China has launched an initiative to push for the crackdown of pornography on search engines like Google Inc. (NASDAQ:GOOG) and Baidu, Inc. (NASDAQ:BIDU).  Pornography is illegal in China, but it is easy to get a hold of it on the Internet.  As ISPs in China discover pornography, they block it.  Seven government agencies in China have gotten together to “purify the Internet’s cultural environment and protect the healthy development of minors.”

The announcement made by the government in China stated that Google and Baidu have failed to make efficient measures in removing links to pornography.  The statement also included Sina and Sohu, several video websites, and forums.  “If we find any violation, we will take action. So far, I haven’t seen any examples of violations,” stated Google China spokeswoman Cui Jin.

China has over 250 million Internet users.  Any website that seems offensive or political has been banned.  Within the last month, China blocked The New York Times website.  During the 2008 Summer Olympics, many websites were reopened for viewing as part of a way to appease tourists.

[via AP]

Baidu.com, Inc. (NASDAQ:BIDU), also known as “The Google of China” has been doing very well since they launched in 2002.   CCTV, a government-controlled TV network in China has reported that Baidu.com allowed unlicensed medical supplier companies to win keyword auctions for higher rankings on search result pages.  Ever since CCTV reported this news, Baidu’s shares have been dropping.

“There’s a very low tolerance for anyone that seems to be involved in exposing consumers to health risks in China,” stated Citigroup analyst Jason Brueschke [AP].

In response to the controvery, Baidu CEO Robin Li stated that all medical, beauty, and diet products must now show licenses before returning back to Baidu’s paid search ad results.

Baidu was also hit with controversy last year when the media reported that the search engine company supposedly repressed information about a tainted milk scare in China.  Baidu responded by saying that dairy company Sanlu Group asked to exclude scandal news from search results, but they refused.

“We are doing this because we care. It is important to us. We want to be a responsible corporate citizen,” stated Li. “If I had to speculate, our traffic will be negatively affected in the short term.”

Google Inc. (NASDAQ:GOOG) has decided to conform with what other search engines in China are succeeding in: MP3 search.  Google China previously invested in Top100.cn, a legal Chinese music download service store.  The Google China MP3 search service is available at: http://www.google.cn/music/.  This service is only available to those in China. 

Below is a screen shot of what the service looks like

[source: China Web2.0 Review]

Google China MP3 search allows users in China to download MP3s, read lyrics, and buy ringtones.  Google China will share advertising revenue with music labels and charges RMB 1-3 yuan per download.  This is Google’s way of competing with Chinese search engine juggernaut Baidu.com.  About 9% of Baidu users search for MP3s.

It was 5 days ago that Google Inc. had confirmed its investment into Xunlei Network Technology Company and now the MPAA is persuading Google to crack down piracy in China.

Xunlei develops software that allows users to download pirated movies.  In the MPAA’s battle to crackdown copyright infringement, the agency has won cases against several companies, including Sohu.com Inc.  Xunlei has 120 million users.

“We’re going to see more lawsuits involving online copyright infringements because Internet companies are making more money and more people are using the Internet,” stated Jasper Zhang, who is a partner at the Zhong Lun Law Firm in Shanghai, China. “Laws and regulations aren’t going to stop piracy overnight.”

In defense of the Chinese company, Xunlei spokesperson Jackson Zhang mentioned that Xunlei does not upload the videos, only provides the P2P software.  Beijing, China Google representative, Marsha Wang reassured that “We’re very serious about respecting copyright.”

Google bought a stake in Xunlei to take on Baidu.com, the largest China-based search engine.

[Source: Bloomberg]