“I was shocked when I first heard about this,” said Chen, a 22-year-old security guard in Beijing, whos been using Baidu ever since he started using the Internet. “Now, even if I look up anything through Baidu, Ill cross-check it through Google just in case.”

Baidu, the leading Internet search engine in China, has seen its traffic decline and stock price slump since November, when a state-run television broadcast criticized its practice of displaying paid search results higher than some free ones, according to Beijing-based research firm Analysys International.

“Until Baidu can clearly demonstrate it has overcome the issues brought up by the negative media reports recently, advertisers will likely pull back spending,” said Steven Chang, chief executive officer at Optimedia China, which buys advertising from Baidu and Mountain View, California-based Google. “Googles biggest strengths are its Dont Be Evil motto and the integrity of its technology, and the company should attempt to capitalize on them in China.”

Since the controversy, Baidu has taken steps to correct problems highlighted in the report on state-owned Chinese television network CCTV. It removed unlicensed providers of drugs and other medical care from its search screens and says the company is redesigning its site so that paid search results are more distinguishable from free ones, though it still co- mingles them.

Internet Growth

U.S. investors say Baidus reforms will be sufficient for the company to maintain its search lead over Google in China. They predict that surging use of the Internet in China will continue to buoy Baidu regardless of the controversy, and that most new Internet users will choose the China-based company over its U.S. competitor.

“Google is not going to win in China,” said West End Capital Managements Sean Cooper in San Francisco, who owns both Google and Baidu shares. “Baidu is not going to be displaced. All this stuff is going to blow over.”

Yet research firms point to a gain for Google. The U.S. search giants share of Chinas online advertising market rose 4.4 percentage points last year to 27.8 percent from the prior year, narrowing the lead of Baidu, whose market share rose 2.9 points to 62.2 percent during the same period, Analysys Chief Executive Officer Edward Yu said in an interview.

Catching Up?

Baidus lead may shrink further in 2009 as fourth-quarter Internet traffic levels, a leading indicator for advertising revenue trends, point toward a decline for the Chinese company and a gain at Google, Yu said.

Baidus fourth-quarter search volumes appeared to fall 3 percent from the preceding quarter, but rose 10 percent from the same period a year ago, according to estimates this month at New York-based Majestic Research Corp. Majestic uses a proprietary method to collect data on Baidu search volumes.

The outcry hasnt resulted in “any significant change in traffic” on its Web site, the company said in an e-mail. Chairman Li declined to be interviewed for this story through Cynthia He, who represents Baidu and public-relations company Brunswick Group Inc.

Hiatus From Baidu

Xu Dong, a 31-year-old marketing executive at a Chinese electronics company, said he stopped using Baidu for a month and began making Web queries through Google after the CCTV report. He said he went back to Baidu after the Chinese company said it would increase scrutiny of its advertisers.

“I got a pretty bad impression of Baidu at first,” Xu said. “But its also important to support domestic companies.”

Baidus American depositary receipts plunged the most in three years on Monday, Nov. 17, the first trading day after the Nov. 15 and Nov. 16 CCTV reports. Google shares also fell that day, amid a broadly declining market.

Google Rises

Since then, Googles shares have recovered, unlike Baidus. Googles shares are up 14 percent since Nov. 14, while Baidus have fallen 30 percent since that date.

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