Jul 11, 2016 06:35 PM

Caixin Explains: New Rules to Govern Online Advertising

(Beijing) –China's commerce regulator issued a new set of rules for Internet ads on July 4 that requires search engines to clearly distinguish between search results and advertisements by labeling the latter as an "ad."

The rules were announced two months after the country's Internet watchdog, the Cyberspace Administration of China, started investigating search giant Baidu Inc. over the death of a college student with a rare cancer, who had complained in an online post that health-related ads found on the company's search engine led him to shoddy treatment. The public outcry following the death of 22-year-old Wei Zexi from Shaanxi Province in April prompted the State Administration for Industry and Commerce to come out with the rules whose publication was delayed for months due to complaints from major Internet companies, a person who participated in formulating the policy said.

The draft rules were open for public comments in July, 2015 and the final version was scheduled to be released in September, the source said.

The Cyberspace Administration of China on May 9 concluded that Baidu's search algorithm "influenced Wei's medical choices" and "affected the fairness and objectivity of search results."

There are no estimates available on the size of the online ad market in China. But Baidu, the country's biggest search engine, said most of its revenue for 2015 came from paid ads displayed alongside its search results, according to the company's filing to the U.S. Securities and Exchange Commission in April.

Here's a detailed look at the new rules, which take effect September 1.

What qualifies for an online ad?

The new guidelines say text, images and videos that contain information "promoting goods or services" and hyperlinks will be considered online advertisements.

How will the policy influence search engines?

Under the new policy, search engines that display promotional materials should label the contents with the word "ad." Up till now, the first few links that appear at the top of a Baidu page with search results for a given keyword are labeled "business promotion" rather than an "ad."

In the filing with the U.S. SEC, Baidu called its business model a "pay-for-performance service," in which advertisers bid on certain keywords that are used by Internet users when searching for content. Baidu said if Chinese authorities classify its pay-for-performance service as online advertising, the firm will be legally required to hand over 3 percent of its ad revenue to the government as a "tax for engaging in cultural undertakings."

The new rules said Internet companies that fail to label promotional content as ads will be fined up to 100,000 yuan per violation.

What other companies will be affected by the new rules?

The policy prohibits email operators such as from embedding ads at the bottom of emails. However, Song Yahui, a law professor at Nanjing University who was involved in formulating the regulations, said the ban was not necessary because most email operators provide free services and a line of advertising does not hurt users.

The rules also ban using apps and hardware to block, filter, or fast-forward ads, which Song said will influence browser makers that allow users to block Internet ads that appear on web pages.

What are some loopholes in the new guidelines?

Song said in practice, it was difficult to draw a clear line differentiating paid ads from other information. For example, while regulators have banned businesses from using pictures of entrepreneurs shaking hands with government officials to promote their products and services, companies can easily argue they were merely using the pictures to provide basic information about the business, Song said.

The new rules require services like search engines that display ads on their platforms to also verify advertisers' qualifications. The guidelines define the party conducting the review as an "ad issuer" and they are subjected to punishment for any violation. For example, if a pharmaceutical company wants to advertise a drug, the ad issuer has to first verify that the company has the relevant government approvals like a business license. Song said Internet companies can avoid scrutiny by arguing they are not ad issuers because they lack the capacity to review all paid ads.

(Rewritten by Chen Na)

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