Making Peace

More label companies might seek cooperation agreements with Internet companies in China after the country's largest search engine Baidu.com won a long-drawn out lawsuit with five multinational record companies.

In December, the People's High Court of Beijing ruled that Baidu's music download services did not constitute an infringement of music content copyright declared by five label companies, including SONY BMG, Warner Music and Universal Music.

The ruling, together with first and second round trials that Baidu.com has won since 2005, has cleared the way for China's largest search engine to provide music search result pages that are linked to unauthorized MP3 download addresses.

The combination of Internet and label industries is a future trend and I think the record companies may have to cooperate instead of launching lawsuits, with Internet companies, says Liu Bin, chief analyst from research firm BDA China.

In 2005, seven companies, including EMI, SONY BMG, Warner Music and Universal Music, accused Baidu of engaging in illegal downloading and playing 137 pieces of music owned by the record companies online without their permission.

They demanded a public apology from Baidu, the suspension of its download service and compensation of 1.67 million yuan.

Ren Xuyang, Baidu's marketing vice-president, said after the final ruling that Baidu will work actively with record companies to seek a business model that will benefit both sides. He said that both Baidu and record companies have many good ideas in mind and will seek to cooperate.

Although China's high court has backed Baidu's music search services, another search engine, Yahoo! China, did not share such luck.

In the same month that Baidu won its lawsuit, Yahoo! China, a distant third player in the country's search market, lost its appeal to the Beijing Higher People's Court which upheld a lower court ruling in April that the search company violated copyright laws to provide music search results.

The court ruled that Yahoo! China must pay $28,600 in damages to label companies EMI, Universal Music Group, Warner Music, Sony BMG Music Entertainment and seven other members of the International Federation of the Phonographic Industry, far less than the $750,000 the music group was seeking.

Although the rulings seem contradictory, Yu Guofu, chief lawyer at Sam Partners Law Firm, says that China's legal institution has reached a consensus that the Web links provided by search engines do not violate content owners' copyrights.

If you examine the two rulings more carefully, you'll discover that Yahoo! China's failure to win the lawsuit is not because it provides music search services but it is reluctant to delete Web links that are confirmed by record companies as illegal, Yu says, noting that such a ruling will have a large impact on both the record and Internet industries.

New business model

Since the rise of the Internet in the late 1990s, major record companies have found themselves in a complex digital world.

At one side, digital music can be easily stored and played in popular music players like iPods. But digital music can also be easily uploaded, copied, downloaded and shared with other people without charge, putting significant pressure on traditional record companies who generate revenues mainly from selling CDs.

The business model of traditional record companies is facing great pressure with the rise of the Internet and digital music, Liu says. If they can't find a profitable way to cooperate with Internet companies, record companies will have to die in the end.

In January this year, Baidu and EMI formed a strategic partnership over online music streaming and downloading services in China, providing a cooperation model between Internet and record companies.

Under the agreement, EMI Music will authorize Baidu to stream its Chinese repertoire on Baidu's music search channel. In return, Baidu will share the revenue from ads that Baidu users are exposed to when they listen to EMI's music online for free.

The two companies also agreed to explore a free music download service and Baidu will set up a special EMI Music Zone in its music search channel, which will legally stream all of EMI's Chinese repertoire.

I think the cooperation agreement is good news for Baidu and EMI Music, since it will help Baidu ease increasing criticism of its music search service and will help EMI to win a better position in the battle against its competitors such as Sony BMG, Warner Music and Universal Music, Liu says.

It will also give a good example for other record companies who need to really think about their future.