China's Internet Mess; Search-engine firms routinely use spyware to capture market share. Now they face allegations of click fraud.

Byline: Ben Robertson

Zhou Rengen knows the value of online advertising. His Web site, yyzs.net, is one of the largest online shopping sites for pharmaceutical products in China. Zhou needed to be at the top of everyone's search list. In 2004 he signed a contract through a sales agent to register with Baidu, China's leading search engine and a rival to American giants Yahoo and Google. Baidu listed Zhou's site among search returns as a sponsored link, and in return Zhou paid a per-click fee to Baidu.

One day Zhou noticed that his payments to Baidu had risen precipitously. Using tracking software, he found that about 70 percent of visitors to his site came from one Web site: an online encyclopedia, Baidu Knows, sponsored by Baidu. Since there were no links on Baidu Knows to Zhou's site, Zhou reasoned that the clicks were fraudulent--generated by software to inflate advertising charges. In September, Zhou filed a lawsuit accusing Baidu of click fraud.

Click fraud is notoriously hard to prove, and Baidu denies the allegation. But the lawsuit underscores the murky nature of the Internet in China, where search-engine companies, in an effort to grab a slice of the Internet advertising pie, resort to tactics that would not be tolerated in the West. In particular, Baidu and Yahoo, two of the biggest search firms in China, are accused in lawsuits of routinely using spyware--a type of software that installs itself surreptitiously on users' PCs--as a way to drive users to their sites. Although spyware is not illegal in China, its rampant use has turned Web surfing into a supremely frustrating experience. And because spyware is associated with illegal activities like identity theft in addition to the merely annoying pop-up ads, it may be undermining consumer confidence in the Web. "Complaints are common in China," says Liu Bin, new-media analyst at Beijing-based consultant BDA.

China's spy wars began in the late 1990s, when entrepreneur Zhou Hongyi invented a Chinese-language search bar, called 3721, that users could install on their browsers. The bar was so successful that rivals quickly began appearing--and many of them used spyware that replaced 3721 with other search bars without users' knowing. Zhou responded in kind--by sending out spyware programs that reinstalled 3721. Now, he says, all the search companies use spyware: "Those who aren't using spyware are fools."