Analysis: Baidu's legal woes in China

September 22, 2005

The legal problems of Wall Street darling Baidu.com, dubbed the "Google of China," worsened Tuesday after state-run media reported an unfavorable court ruling.

The highest law court in Beijing's famed high-tech district on Monday ruled in favor of Shanghai-based record agency Push Sound (with links to EMI) on 34 out of 46 charges of copyright infringement it made against Baidu in June 2005, before the firm was listed on NASDAQ in the following month.

Baidu's meteoric price rise of more than 300 percent on the first day of its offering in August has been followed by September shares tumbling on news analysts say it was overvalued together with mounting legal problems. Push Sound's complaint was that download services on Baidu's Web site harmed its interests in Internet distribution of music.

The district court in Haidian agreed, ordering Baidu to stop providing download links to the songs and pay 68,000 yuan ($8,380) in compensation to Push Sound. The company was asking for 460,000 yuan ($57,000) in compensation and for Baidu to make a public apology in China's leading law newspaper, Legal Daily.

It was the second consecutive day Baidu's legal blues were carried in the Chinese press. Monday's China Daily warned Baidu was facing a welter of lawsuits from music giants like EMI, Universal, Warner, Sony BMG and their local subsidiaries targeting legal action against China's most-used search engine alleging copyright infringement on hundreds of songs.

According to state media, downloading music accounts for about 20 percent of traffic for Internet search function firms like Baidu and Yisou under Yahoo!

In the Chinese press Tuesday Baidu Vice President Liang Dong denied it was infringing on copyrights by the search engine's provision of links to other Web sites with songs.

Baidu is challenging the ruling handed down in Haidian, arguing it does not offer downloading services itself and should not be held legally responsible. "We understand Push Sound's action against us, but it is targeting the wrong people," Liang was reported saying.

Duncan Clark, one of the managing directors at China-based telecommunications and Internet consultancy BDA, explained to United Press International some of Baidu's travails and other issues at stake in the marketplace.

Asked why the pending spate of legal action against the Chinese search engine since its initial public offering, Clark said, "The IPO has given Baidu a much higher profile internationally, as well as cash. If the company is seen to be an example of a tolerated means of profiting from piracy, albeit indirectly, that is a perception the music industry will want to change through intervention."

Clark told UPI that Chinese firms, foreign firms in China, "anyone operating a search engine, or cooperating with a search engine" was vulnerable to the types of charges that Baidu faces. He cited a recent action by another NASDAQ-listed Chinese Internet portal, Netease. On Aug. 15 it stopped providing MP3 search services, saying that MP3 searching did not infringe on the interests of copyright owners, but helped real infringers.

Clark was asked about movie downloads, the other major IPR violation issue within the entertainment industry. "Given the extent of DVD piracy, I would imagine this is somewhat less of an issue, however the time to download a movie has fallen dramatically," he noted.

BDA's managing director said, "China Telecom and China Netcom in some cases have interfered with BitTorrent (which accounts for a huge amount of traffic in China as in the United States) more from a concern over its impact on connection speeds than piracy."

"Offline piracy is so bad in China that the Internet problem is less relative to the U.S. and Europe," Clark said, adding, "figuring out a solution to charge for interactive content (a la Shanda, but for music) would be that much more valuable in China -- harnessing the power of the Internet to generate revenues where they never existed offline."

Clark made the observation: "Recorded music is an incredibly tough business in China. Some labels (in Taiwan as well) put their own restrictions on CDs, so that you can't 'rip and burn' to a PC/CD-ROM. But copies are bound to get out somehow."

Finally, UPI asked Clark whether Baidu's legal problems were a good or bad thing for China's Internet industry.

"All parts of the online population, and broadband population, are growing up. It's a natural phenomenon, as firms like Shanda, Netease and The9 have shown, it's possible to make money from 'pay to play.' And now, fair enough, record labels, Hollywood and China's domestic media industry want in," the BDA director said.

"As fixed-line telcos have seen, just selling connectivity for broadband is not enough -- they need more value added revenues. So I'd say the flurry of activity is a good sign for the future.

"China has precious few entertainment lawyers, so maybe there'll be a few more inspired to specialize in the sector. I'll leave you to decide whether that's a good or bad thing."

Copyright 2005 by United Press International