China: Wiki-Hudong against Wiki-Baidu - an abuse of dominance?

Last Updated: 23 March 2011
Article by Susan Ning, Liu Jia and Angie Ng

We understand from media reports that on 18 February 2011, Hudong1 (a Chinese internet search engine) made an Anti-Monopoly Law (AML) complaint to the State Administration for Industry and Commerce (SAIC) against Baidu2 (arguably the most often or commonly used internet search engine in China; often referred to as China's equivalent of "Google").

Background

Specifically, Hudong has alleged that Baidu has abused its dominance by manipulating online search results and therein either lowering the ranking of, or eliminating Hudong Bai Ke (which refers to Hudong's wiki-like encyclopedia services) from online search results.

Both Hudong and Baidu offer a spectrum of online internet services, including online "wikipedia"-like or encyclopedia-like services. Hudong's wiki-like encyclopedia service is known as Hudong Bai Ke. Baidu's wiki-like encyclopedia service is known as Baidu Bai Ke.

According to Hudong, Baidu has allegedly either lowered the ranking of, or eliminated Hudong Bai Ke from its unpaid search results in favour of Baidu Bai Ke. Hudong further alleges that Baidu has undertaken this conduct with the intention of driving out competition in relation to wiki-like encyclopedia services.

Hudong has requested that the SAIC launch a formal investigation into the above mentioned conduct of Baidu and has suggested that SAIC levy a fine of RMB790 million on Baidu. The Chief Executive Officer of Hudong has also been quoted as suggesting that the SAIC should consider "breaking" Baidu's business up into two main segments: online search engine services; and other online services.

Abuse of dominance?

Hudong has alleged that Baidu has breached the prohibition against an abuse of dominance pursuant to the AML. They have made the complaint to the SAIC, which is the competition authority in charge of investigating and enforcing non-price related breaches of the AML.

Article 17 of the AML prohibits dominant business operators from abusing their dominant market positions. Article 17 of the AML also lists examples of several types of conduct which, may, in particular, violate the provision; including: excessive pricing; predatory pricing; bundling; refusal to deal and so on. It is clear that this list of examples of conduct which, may, in particular, violate Article 17 is not exhaustive. This is evident because of the existence of Article 17(7) which is a "catch all" provision – this provision states that the antitrust authorities may stipulate other types of conduct which amount to an abuse of dominance.

Media reports in relation to this Hudong-Baidu complaint only state that Hudong has alleged that Baidu has abused its dominance. However, the reports do not cite the particular provision which Baidu has allegedly violated. Since Baidu's alleged breaching conduct does not "fit" neatly into any of the examples listed in Article 17 (e.g. refusal to deal; bundling etc), we think that Hudong's allegations have relied on Article 17(7) (the "catch-all" provision).

In order to establish a breach of Article 17, the SAIC would need to be satisfied that:

  • Baidu is a dominant business operator in the relevant market;
  • Baidu has abused this dominant position in the relevant market by undertaking the conduct mentioned above; and
  • Absence of valid reasons.

It is unclear what would constitute the "relevant market". If the relevant market is construed as "online search engine services"; then the SAIC would need to be satisfied that there is sufficient evidence to prove that Baidu is dominant in relation to this market. We note that in a previous abuse of dominance court application against Baidu (the application was made by Tangshan Renren), the Beijing First Intermediate People's Court was of the view that Tangshan Renren did not provide sufficient evidence to prove that Baidu was dominant in the online search engine market.3

It is also possible that the SAIC would determine that the relevant market should be construed more narrowly – e.g. the online wiki-encyclopedia services market. In this case; a few questions arise, including: Is Baidu Bai Ke a dominant wiki-encyclopedia service provider in China? If not, has Baidu leveraged its alleged dominant position in the online search engine market to drive out competition in this narrower market?

Remedies

As mentioned above, Hudong has suggested that the SAIC impose a fine amounting to RMB790 million on Baidu. It is, however, unclear how Hudong has come up with this amount of a proposed fine.

In addition, we note that the CEO of Hudong has suggested that SAIC may wish to consider breaking Baidu up into two business segments: its online search engine business and its other online services (no doubt including Baidu Bai Ke). This is an interesting proposal.

We note that pursuant to the AML, the antitrust authorities (including the SAIC) do not have the express power to impose a divestiture or structural remedy on Baidu. Article 47 of the AML only lists the following remedies in relation to an abuse of dominance: fines, injunctions and damages.

However, Article 45 of the AML states that the antitrust authorities (including the SAIC) may decide to suspend an AML investigation process, if business operators undertake to adopt specific measures to eliminate "consequences" of their anticompetitive conduct. Perhaps this is the provision that may provide a possibility that the business operator can offer a structure remedy to the anti-monopoly enforcement agency to terminate the investigation.

Other observations

The basis of this Hudong-Baidu complaint echoes the current European Commission (EC) investigation into conduct undertaken by Google. Specifically, we note that on 30 November 2010, the EC announced that it decided to commence an antitrust investigation into allegations that Google has abused its dominant position in online search – following complaints by search service providers about unfavourable treatment of their services in Google's unpaid and sponsored search results coupled with an alleged preferential placement of Google's own services.

We think it is likely (given that China is a relatively new antitrust jurisdiction) that the SAIC will consider any decisions arising out of the EC-Google case as persuasive evidence in relation to this Hudong-Baidu complaint.

1. See: www.hudong.com

2. See: www.baidu.com

3. The Baidu-Tangshan Renren case had to do with paid online advertising services – the latter alleged that the former abused its dominance by manipulating search results when the latter reduced payments to Baidu.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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