Baidu Rocks, Unfortunately

Music labels are rallying once again against Baidu.com (Nasdaq: BIDU  ) . Claiming that Baidu's search engine links directly to pirated MP3 files, a consortium of labels is suing both Baidu and Sohu.com's (Nasdaq: SOHU  ) Sogou.

Chinese courts ruled in favor of Baidu, but a recent music-industry victory against Yahoo! (Nasdaq: YHOO  ) in China may have record companies feeling empowered to take on China's leading search engines with the help of updated legal language.

We're not talking about colossal fiscal blows to these cash-rich search engine stars. The judgment against Yahoo! China was for a mere $27,000. However, it was a breakthrough in principle. Given its notorious reputation as a hotbed for copyright trampling, China's move to hold a search engine culpable for deeplinking to unauthorized downloads is huge.

It's easy to see where both sides are coming from here. Chinese search engines know that a lot of their traffic comes from young Chinese citizens looking for free tunes. They clearly profit from that traffic. However, it's hard to fathom going after the telephone company when a shady telemarketer calls, or sticking it to search engines when they link to sites that cripple unprotected computers with spyware.

Baidu's attempts to be harmonious
This isn't to say that Baidu hasn't tried to play nice with the industry. It hooked up with Taiwan's popular Rock Music Group label last year, launching an ad-supported music-streaming service. The move came just months after Baidu scored a similar revenue-sharing arrangement with EMI. It teamed up with Viacom's (NYSE: VIA  ) MTV to roll out a video streaming feature in 2006.

Labels aren't stupid. They realize that if users are flocking to search engines -- Baidu commands the majority of the search queries requested within China -- it's in their best interest to reach that traffic and control the experience.

Whipping out the legal eagles isn't the ideal solution, but it's often a necessary move when costly investments in intellectual property are at stake.   

Ironically, music has become a thinner slice of Baidu's traffic pie recently. Web-tracking site Alexa.com allots just 7% of Baidu's page views to its Chinese music search portal at mp3.baidu.com. A little more than a year ago, Baidu was counting on its music engine to drive 15% of its overall traffic.

Good riddance to pirates
Let's be honest. No search engine wants to become a file-swapping hub. The traffic may seem nice, but making money off it is a tall order. When you court freeloaders, you're inviting users who have no intention of spending money through advertisers. There's nothing wrong with rounding up a crowd of panhandling convenience-store loiterers, but you certainly can't expect to sell them anything.

In that sense, radically filtering their music-search functionality may be the best thing for companies like Yahoo!, Baidu, and Sohu in China. Advertisers would bid up keywords more confidently and aggressively, knowing that they're reaching a more marketable audience.

There will always be smaller search engines and peer-to-peer music-trading networks serving up renegade MP3s. But while losing that traffic may not look good on paper, it will probably be beneficial to the bottom line. In other words, the dot-com heavies in China need to grow up and let the moochers get their freebies elsewhere.

Google's (Nasdaq: GOOG  ) YouTube hasn't suffered a traffic hit domestically since it gradually began to filter out unauthorized uploads with content-identification measures. Napster (Nasdaq: NAPS  ) is taking in more revenue now as a legal music service, despite serving a smaller audience than it did when the brand drew tens of millions of file swappers.

Not all traffic is good traffic. I don't agree with the labels' choice to pursue the search engines rather than addressing their own shortcomings. But this is the one time when appeasing the labels isn't just the right thing to do -- it's the right business decision.

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