Baidu, China’s largest internet search group, reported a 23.5% increase in first-quarter net profits as it took advantage of continued growth in the number of web users in Asia’s second largest economy.
But the Nasdaq-listed company warned that the global downturn was affecting online advertising.
The company registered a rare drop in the number — of active online marketing customers 
companies bidding for paid search listings or keywords or buying ads on Baidu’s pages — and in the revenue per online marketing customer from the fourth quarter.
Online ad customers were down by 6.1% from the fourth quarter 2008 to 185,000, and revenue per customer was RMB4,400, down 4.3% sequentially.
The company explained it like this: ‘The sequential decreases were primarily due to the usual seasonality associated with the Chinese New Year, a weaker economy, and the carry-over effect of the actions Baidu took near the end of 2008 to improve the quality of its customer base.’
That last refers to action Baidu took in November 2008, when it promised to stop selling paid search rankings and keywords to unlicensed medical websites and other ‘problematic’ customers. It had to because it was under threat of legal action and the government was concerned.
In the wake of the controversy, Baidu also slightly adjusted its sales model.
It has officially introduced ‘Phoenix Nest’, a new keyword bidding system under which more paid listings will be more easily recognizable as such for users of Baidu’s search engine.
This is not the complete answer. More a nod towards business probity. Baidu is not planning to abandon mixing paid and ‘organic’ search results altogether. In doing this it is, perhaps, giving Google a chance to gets its feet under the table. Google is resolutely non-commercial in the way it lists its sites. This may become a significant marketing advantage.
The Financial Times reported Robin Li, chief executive, seen above, as saying the new system was having a negative impact on revenues in the short term but he expected a positive impact in the longer term.
Baidu holds more than 60% of China’s online search market.
Google, the distant second in the Chinese market, has seen its market share rise over the past year and is getting more aggressive with free online music search service launched last month.
In the three months to March 31 2009, Baidu reported net profit of RMB181.1million ($26.5million) on total revenues up 41.5% from a year earlier at RMB810.7million.
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