2.6 Billion Ears at Stake in China

By Rick Aristotle Munarriz
December 21, 2007 | Comments (0)

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China is finally starting to crack down on illegal music-swapping sites. Why are you laughing? It's really happening this time.

Yahoo! China -- the online portal run by Yahoo! (Nasdaq: YHOO) in conjunction with Alibaba Group -- was hoping to overturn a ruling that deemed its music-delivery service to be in violation of Chinese copyright laws.

It lost. Again. Even if Yahoo! China isn't providing the free tunes itself, by allowing users to search for, stream, and download music without leaving the portal, Yahoo! China is clearly benefiting -- and profiting -- from the piracy.

Teacher's pet Baidu.com (Nasdaq: BIDU) had a similar case dismissed, but the writing is on the Great Wall: China isn't going to be as forgiving about copyright trampling as it has been in the past.

The 11 record companies that filed suit against Yahoo! China -- major labels in China as well as global juggernauts like Sony (NYSE: SNE), Universal, and Warner Music Group (NYSE: WMG) -- are no doubt pleased with the verdict, but they can't be overly confident. Just because something isn't readily available for free doesn't mean that consumers will pay for it.

The music industry is trying to take a stand in cyberspace. It's not just about transforming the Napster (Nasdaq: NAPS) brand into a licensed distributor, or getting Google's (Nasdaq: GOOG) YouTube to pay up when a hobbyist with a webcam uses a major-label recording in the background of his video. This morning's Wall Street Journal details how the publishing arms are going after the free guitar-tablature websites the same way they're trying to get lyrics sites to share the wealth.

In short, the future of the music industry isn't so bleak if labels hack away at their cost structures while growing the number of incremental revenue streams that are now available. With a fifth of the world's population in China, the ruling against Yahoo! China is welcome, but it's really just the beginning phrase of the music score.

There are miles to go before they sleep, and musical bars to go before they reap.

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Longtime Fool contributor Rick Munarriz has been a fan of China's growth stocks for several years now, even though he does not own shares in any of the companies in this story. He is part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

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