Baidu Gets an Earful

The song won't remain the same for China's leading search engine.

China's official news agency is reporting that Baidu (Nasdaq: BIDU  ) and several other sites will be punished by the government for their inability to curb rampant music piracy. Even though Baidu itself isn't serving up illegal downloads, its thorough indexing of third-party websites is contributing to the wider distribution of digital piracy.

We've been here before. Baidu and Sohu.com's (Nasdaq: SOHU  ) Sogou prevailed in the past, but things have been tense since Yahoo! (Nasdaq: YHOO  ) came up short four years ago.

We still don't know the severity of the government's punishment. Yahoo! was slapped with a tiny $27,000 fine in 2007. Baidu's cash-rich balance sheet can absorb the resulting tab. The real pitfalls for Baidu shareholders here are the costs related to cleaning up its indexing and the potential drop in traffic as file-hungry music buffs seek their pirated files elsewhere.

The global music industry is in a funk. Digital sales were supposed to help offset the decimation of CD sales, but that's just not happening anymore. Warner Music Group (NYSE: WMG  ) has posted nine consecutive quarterly deficits, with digital sales taking a sequential dip for three straight quarters.

Baidu is hoping to launch a licensed music service next month. It's a move that will turn Baidu from enemy to friend, but it will always be a frenemy.

Baidu has tried to play nice -- publicly -- in the past. It struck a deal with Viacom's (NYSE: VIA  ) MTV to provide ad-supported streaming of music and music videos several years ago. That was followed by similar pacts with major labels including EMI and Taiwan's Rock Music Group. It's all been a front, since track seekers know they can count on Baidu's deep-linking efficiency to smoke out unauthorized uploads for free.

There's obviously more at stake these days. Baidu's been a 17-bagger since I recommended it to Motley Fool Rule Breakers subscribers five years ago, hitting a fresh all-time last week. It's a global icon now with hundreds of thousands of advertisers willing to pay top dollar to generate a lead through China's search engine of choice. When Baidu reports its quarterly report this week, analysts see earnings more than doubling. Baidu is too legit to be dogged as a hub for illegal downloads, just as it had to overcome last month's embarrassment over unauthorized works going up in its free literature site.

It's time for Baidu to shake the notoriety.

Should Baidu -- or any search engine -- be held accountable for linking to pirated tracks? Share your thoughts in the comment box below.

Baidu and Sohu.com are Motley Fool Rule Breakers recommendations. Yahoo! is a Motley Fool Global Gains pick. The Fool owns shares of Yahoo!. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz has only been to China once, but he relishes admiring its dot-com revolution from afar. He does not own shares in any of the stocks in this article. 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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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 28, 2011, at 8:23 PM, dexvader wrote:

    Rick, after all these years, you still don't get how it works in China with regards to music piracy and you're asking the wrong questions here: "Should Baidu be held accountable for linking to pirated tracks?"

    Baidu is not only linking to tracks they know are pirated, but they are also hosting numerous tracks themselves. They stand to benefit the most from having these popular tracks readily available. This traffic for music downloads is part of the overall Baidu experience.

    "Baidu is too legit"? Man, do you even know how search engines in China work? For the right price from big companies, they take down inconvenient search items and fix news stories.

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