Intellectual Property

A Win for Record Companies in China


For years, Chinese search engine Baidu has enjoyed a big advantage in the world’s largest Internet market. Millions of Web surfers in China used Baidu’s MP3 search service to find links to free—and unauthorized—downloads, a feature that rival Google (GOOG) declined to offer. Foreign record companies sued to stop the service, but Baidu won the first round in Chinese courts by asserting that it only provided links, not the actual content. Even after the U.S. government in February tried to shame Baidu into compliance by putting it on a list of more than 30 of the world’s most “notorious markets” for pirated products, the company persisted.

Now Baidu is making peace with major record companies. On July 19 the company announced it had signed a deal with Universal Music, Warner Music, and Sony Music (SNE) to offer copyrighted songs on a new social music platform called Ting! (Mandarin for “listen”). Baidu will pay content owners an undisclosed sum for each click, and in return record companies have agreed to drop an appeal of their lawsuit against Baidu. “We are serious about bringing discipline and order to the Internet with regards to music,” says Catherine Leung, Baidu’s general manager for music and entertainment.

Baidu controls more than 75 percent of China’s Internet market and got a boost when Google shut its mainland-based search operation last year. Shares in Baidu have jumped 65 percent this year, after more than doubling in 2010. On July 25 it reported a 95 percent increase in quarterly profit, to $253 million. “They don’t need [the download links] anymore,” says Eric Wen, head of telecom/Internet at Mirae Asset Securities in Hong Kong. And the reputational damage was a problem for a company hoping to expand beyond China. The MP3 search service, says Wen, “is just a pain in the ass.”

Other Chinese Net companies are also trying to clean up their intellectual property acts. Video sites Youku (YOKU) and Tudou have teamed up with Hollywood studios to cut back on unlawful access to TV shows and movies. Taobao, the country’s top online retailer, last year launched what it calls its Anti-Counterfeit Volunteer Corps, in which some 2,400 people help root out fake goods for sale on the website. Taobao has a new online system that lets brand owners submit complaints about suspected piracy, and in March the retailer teamed up with 89 international brands such as Gucci, Louis Vuitton, and Chanel to buy suspected fakes and penalize sellers. So far the company has purchased 608 products and identified 390 of them as unauthorized. “We are committed to working with [copyright owners] to protect their IP rights,” says Sara Yu, an attorney with Taobao’s owner, Alibaba Group.

The government is doing its part, too. After a blogger posted photos of retailers in the southwestern city of Kunming that mimicked the look of Apple (AAPL) stores, a local newspaper reported on July 25 that authorities shut two of them because they had used Apple’s logo without permission. In June the government concluded a nine-month crackdown on counterfeit goods, a campaign that a website sponsored by China’s Ministry of Commerce praised for its “remarkable achievements.” Ted Dean, chairman of the American Chamber of Commerce in China, is less enthusiastic, saying 70 percent of his members believe Chinese intellectual property protection remains ineffective. He does, though, acknowledge that the government has “increased focus and better coordination” on the issue.

There are limits to how much intellectual property protection companies can expect in China. Though Kunming authorities shut the two fake Apple shops, three others continue to operate. And pirated music is migrating elsewhere on the Net. The industry has lawsuits pending against two Baidu rivals, and others may try to move into the space, says Leong May-Seey, Asia director at the International Federation of the Phonographic Industry. The Baidu deal is important, Leong says, but it “by no means solves our problem.”

The bottom line: Baidu, which controls 70 percent of China’s Internet market, is cracking down on pirated music, though other sites still offer it.

With Dexter Roberts
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Einhorn is Asia regional editor in Bloomberg Businessweek’s Hong Kong bureau. Follow him on Twitter @BruceEinhorn.

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