Google, Baidu: Battle of the Bands

It's time to hear whether Google (Nasdaq: GOOG  ) can sing in Mandarin. The world's leading search engine is launching a legal digital-music downloading service in China this week, in hopes of showing up rivals such as Baidu.com (Nasdaq: BIDU  ) and Sohu.com's (Nasdaq: SOHU  ) Sogou, which have become havens for pirated MP3 file searches.

Google is doing this by the book. It has struck revenue-sharing deals with music labels to offer licensed digital downloads in a free, ad-supported format. The labels may not get much out of the deal, given the nascent stage of online advertising monetization in China, but it's better than nothing.

The labels have sued Baidu and Sohu before, but the courts have typically sided with the search engines. They do not host the illegal tracks, even though the third-party piracy sites do show up on MP3-specific searches. The labels did win a rare victory against Yahoo! (Nasdaq: YHOO  ) in a similar case last year, so they're going after the Chinese-based companies again this year.

The challenge for Google's white-hat approach is to win over conscientious Chinese music fans. But if Google's site proves to be too ad-riddled, or the selection too lean, young Internet users will probably go right back to the readily available pirated MP3s.

What's more, Google isn't breaking new ground by taking the "do no evil" approach to succeed on China's digital-music scene. Baidu hooked up with Taiwan's Rock Music Group label last summer to launch an ad-supported music-streaming service. It also scored a similar deal with EMI. Two years ago, it teamed up with Viacom's (NYSE: VIA  ) MTV to roll out video streaming.

Bad to the Baidu
Going legit hasn't gotten in the way of Baidu's runaway success in the online space, either. Baidu remains China's leading search engine by a wide margin.

At the same time, evidence suggests that Baidu is becoming less of a source for pirated tunes. Web-tracking site Alexa.com has just 6% of Baidu's page views coming from its Chinese music search portal at mp3.baidu.com. Two years ago, Baidu was counting on its music engine to drive 15% of its overall traffic.

Has Baidu cleaned up its act so much that consumers are going elsewhere, or has China done a better job of converting file-snatching pirates into label-supporting ad consumers? Either way, Google's approach is commendable but certainly not original.

Following in America's footsteps
China may simply be following the example that we've set here in the States in recent years. Illegal downloading still runs rampant, but legal digital-music downloading services are here to stay. If someone were to tell you a decade ago that Apple (Nasdaq: AAPL  ) would become the country's leading music retailer, you would have laughed hysterically.

Trends come and go. China's music labels would naturally prefer to follow Apple's lead of selling tracks and digital CDs at premium prices, but they'll settle for the more palatable gateway drug in the form of ad-supported downloads.

Even then, the job won't be easy. Even if all of the leading portals are on board with Google's approach -- from Sohu to Baidu to SINA (Nasdaq: SINA  ) -- it will still be a tall order to get China's youth to pay for digital music in great numbers.

However, you have to start somewhere. In the music world, I guess you would call this an opening verse. The industry still needs to work its way up to a catchy hook.

Baidu has quadrupled since being recommended to Rule Breakers readers less than two years ago. Google is another Breakers pick. SINA and Apple are recommendations for Stock Advisor subscribers. Why are you missing out on these great stock picks? Grab a 30-day pass to any or all of our newsletter services.

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 also 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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