Eric Zhu is just the sort of customer that Western music labels want to reach in China. The 28-year-old Beijing resident is a sales director for a local company and enjoys listening to Western pop, from the Backstreet Boys to the Spice Girls, on his MP3 player. Zhu doesn't pay for his tunes, though. Like millions of other young Chinese, he downloads them for free using Baidu.com (BIDU), the country's biggest search engine. Baidu makes it so easy—just hit the MP3 tab on the home page, type in the name of the song, and click. What's more, Zhu doesn't believe he and his friends are doing anything wrong. "I think it's a problem with the law, not with us users," he says.
China, home to a thriving commerce in counterfeit software and bootlegged films, has also become the world capital of pirated music. Almost 100% of music downloaded from the Net is stolen, according to Leong May See, Asia director for the International Federation of the Phonographic Industry, an umbrella group that includes Sony BMG Music, Universal Music, and Warner Music. It doesn't help that two of the country's most popular search engines, Baidu.com and Yahoo China (YHOO), help users find and download songs quickly, and, Leong alleges, illegally. The two provide "deep search" services that allow listeners to download free MP3s from the databases of other sites without ever having to go to those sites themselves. "We have huge problems in China," says Leong.
It's not just the international music in- dustry that has a beef with China's search engines. Google China (GOOG) is struggling to compete against Baidu, which has an edge thanks to its music downloads. Local startups trying to build businesses around selling music online also gripe about Baidu and Yahoo China. "Baidu is at the root of the problem of illegal music downloading," says Wu Duanping, chief executive of online music seller Zhejiang Flyasia Electronics Business Co., based in Hangzhou. Baidu and Yahoo China declined to comment.
Baidu has started reaching out to the recording industry. In January, it announced a plan with EMI Music to provide free online streaming, which allows listening without downloading, of all of the label's Chinese songs. A notice on Baidu's Web site says, "it is Baidu's policy to attach great importance to the protection of copyright and comply with all the applicable [Chinese] laws." The notice adds that after learning of an infraction, "Baidu will remove relevant links in accordance with the applicable laws, regulations, and binding measures."
Flyasia's Wu actually did get Baidu to remove links to some of the more than 1,000 songs his outfit owns rights to—after he filed a lawsuit. But he says the problem persists, and his staff is not up to the task of constantly policing Baidu's site. "There are so many links," says Wu, whose case will be heard by a Beijing court in October.
The IFPI has filed about 300 lawsuits in Chinese courts, estimates Leong, and has won about 90% of them. In April, a court ruled that Yahoo China's MP3 search service enabled online piracy. But just five months earlier, the IFPI lost a similar case against Baidu when a Beijing court accepted the company's argument that it's simply providing a link to third-party content. Both cases are now on appeal. The IFPI estimates it spends some $13,000 per case. Yet the damages awarded average just $130 per suit, so there's "no deterrence," says Leong. That's why her group is also trying to get Chinese authorities to act. On Aug. 13, the U.S. dispatched a formal request to the World Trade Organization asking it to take action against China's alleged piracy of music, movies, and software.
Unlike Leong, some believe the situation is getting better. Jianguang Li, a partner with IDGVC Partners, part of Framingham (Mass.)-based International Data Group and one of the biggest venture-capital investors in China, says more Chinese are learning to respect intellectual property online. Li's fund has even invested in Chinese companies that charge for music and TV programming delivered over the Net. "Three years ago we definitely couldn't make the model work," he says.
One Internet pioneer that still can't seem to make it work is 9sky, one of the first Chinese sites to charge for music downloads. In an e-mail exchange, CEO Michael Cao blames search engines like Baidu for the fact that after four years, his business is still on shaky ground: "We desperately need for the entire environment to improve."