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Yahoo's China Challenge

The music industry accuses the company of serving up illegal files on the mainland. Doing business in China just gets trickier

With the second-biggest online population in the world after the U.S., it's easy to see China's appeal to the world's biggest Internet companies. But even for them, tapping that market is no slam dunk. Just ask Yahoo! (YHOO).

The company's latest headache in China comes in the form of a possible lawsuit by the Britain-based International Federation of the Phonographic Industry (IFPI). The trade group, representing some 1,450 members of the recording industry in 75 countries, accuses Yahoo! China of providing links to illegal MP3 files through its online music search engine. People close to the matter expect a suit to be filed within the next two weeks. In April, the group had sent a cease-and-desist letter to Yahoo! China, a partnership formed last year when Yahoo! spent $1 billion for a 40% stake in Chinese e-commerce company

IFPI's fighting words underscore China's role as a key battleground in the larger struggle by the music industry against music piracy (see, 7/5/06, "Yahoo China vs. Global Music Industry").

At issue are links from Yahoo! China's MP3 search site. The IFPI argues that Yahoo! China should be held responsible because the links emanate from a content site, not a general search engine or portal. If the links were simply from general search queries, Yahoo! would just be acting merely as an Internet service provider, and hence not responsible for the content on those links.

The Next Example

Furthermore, the group argues that because the site is hosted by Yahoo, users may not even know they're downloading pirated music. "Yahoo! China has been blatantly infringing our members' rights," IFPI Chairman and CEO John Kennedy said in a statement. "We have started the process and as far as we're concerned we're on the track to litigation. If negotiation can prevent that, so be it."

Yahoo! China has reason to take the threats seriously. Last year, the IFPI went after, China's biggest search engine, citing similar infringements, leading to an order by the Chinese courts to stop linking to illegal sites. Yahoo! China representatives have said the company is acting within the law. Yahoo! Inc. spokeswoman Mary Osako says her company "absolutely supports the widespread protection of copyright laws and strongly opposes the violation of copyright protections by companies or individuals. Yahoo! Inc. aims to respect all intellectual-property rights and will remove any content when we become aware of material that infringes on copyrights."

The Recording Industry Association of America (RIAA), which has been the music-piracy watchdog in the States, is unlikely to weigh in on this issue publicly. A spokesperson for the organization said that the IFPI represents the same interests and handles international issues, while the RIAA protects the industry in the U.S.

Unknown Territory

Yahoo! has had other recent hiccups in China. It, along with Google (GOOG) and Microsoft (MSFT), came under fire back in February for censoring search results at the behest of the Chinese government (see, 2/16/06, "The Web and China: Not So Simple"). Yahoo! has also drawn criticism from U.S. lawmakers and human-rights groups for giving Beijing authorities e-mail information that led to the conviction and 10-year imprisonment of a Chinese journalist, Shi Tao.

The struggles show the complexity of doing business in China, even with a strong local partner like the one Yahoo has in Alibaba. It's not just a huge unknown market for U.S. companies, but it's also constantly changing. Although China isn't known for enforcing copyright and intellectual-property laws—some 85% of the music consumed in China is pirated, says the IFPI—the government is working to change that. In fact, the IFPI is counting on new anti-piracy laws to make its case.

Google will also be watching Yahoo's steps closely. Google is making a big push for share in China, but so far has failed to chip away at Baidu's lead. The company's Chinese site was blocked in several major Chinese cities because the government wasn't satisfied with its efforts to censor search results. And any hope for a deepening partnership with—or outright acquisition of—Baidu was dashed in June when Google sold its small stake in the Chinese company. China continues to prove a tough Internet market for foreign companies to crack—local partners or no.

Lacy is a writer for in Silicon Valley, and Scott is a BusinessWeek intern in London .

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