Can music labels get Chinese pirates to walk the plank?

We'll see, now that the industry's lawsuits against leading Chinese search engines Baidu (Nasdaq: BIDU) and's (Nasdaq: SOHU) Sogou are moving ahead after last year's victory over Yahoo! (Nasdaq: YHOO).

The amounts may not seem like much -- the labels are seeking just $9 million and $7.5 million in damages from Baidu and Sohu, respectively -- but this represents just a handful of songs. The stakes can climb considerably if the industry smells a whiff of victory here.

That's certainly not a given. Baidu prevailed in a similar lawsuit two years ago. The Chinese government has also been known to root for the home teams. If Baidu and Sohu get hit with a devastating decision, it'll only strengthen Baidu's nearest competitor, Google (Nasdaq: GOOG), which has largely avoided the MP3 search market.

The blame game remains the same
The bigger crux is deciding where the industry can shut off the spigot of rampant music piracy in China. Baidu and Sogou aren't distributing illegal downloads. Their search engines are simply being used by music-lifting thieves to find copies of tracks hosted elsewhere.

To be fair, Baidu and Sogou aren't exactly innocent. They profit from the generation of search traffic, and they have areas dedicated to MP3 searches. That isn't a crime in of itself, because MP3 files are often made freely distributable by indie artists for promotional purposes, but who are we kidding here? China's youth turns to the MP3 searches mostly to get illegal downloads they'd rather not pay for commercially.

There has always been a gray area of culpability, even on the global search stage. If a search through Google leads you to a website infected with malware, is Google liable? If your kid, searching through Yahoo!, finds a link to a site providing free adult entertainment, is Yahoo! guilty of contributing to the delinquency of a minor? Can the Chinese government even point the finger at itself? A history of shutting down sites with video clips of Tibetan unrest or references to the Tiananmen Square protests may lead one to believe that China bears the burden of turning off the illegal MP3 hosts directly, by precedent.

These aren't easy questions to answer. Chinese search engines are becoming litigation magnets for the recording industry, both because they're gateways to piracy and because they have the money that penny-pinching downloaders and renegade file-sharers don't.

A simpler plan
All the same, Baidu's taking steps to shake its reputation as a pirate haven. It inked a deal with Viacom's (NYSE: VIA) MTV to provide ad-supported streaming of music and music videos, followed by similar pacts with popular labels like EMI and Taiwan's Rock Music Group.

Baidu's hands aren't clean, but they're not dirty as they used to be. According to Web watcher, traffic to Baidu's music search engine -- at -- has shrunk from 15% of overall Baidu traffic to just 6% over the past two years.

This brings me to wonder whether Baidu and Sohu wouldn't be better off shutting down their MP3 functionality until more effective copyright infringement checks are available. Even if the act itself may indicate some degree of culpability on their part -- a dangerous tack, when litigants are lining up -- isn't it time to cut the cord?

All moral questions of illegal downloads aside, from a strict business perspective, it doesn't make sense for a company like Baidu, which relies on providing quality leads to advertisers, to attract freeloaders. Not all traffic is created equal. Even if Baidu prevails this time around, adding more low-quality searchers at the expense of more lucrative visitors could subtract from its top and bottom lines.

In fact, creating a search engine for legitimate MP3 file providers might give birth to China's own version of -- at least, the way it was before CNET Networks (Nasdaq: CNET) snapped up its domain.

Occupying the gray area of the file-sharing debate hasn't hurt Baidu yet. Its shares have more than tripled since I recommended the stock in the Rule Breakers newsletter service less than two years ago. However, it's time for Baidu to get even more vigilant about its brand positioning.

Baidu can and should still remain relevant in the music industry -- but only on ad-friendly and label-friendly terms.

For related Foolishness:

Baidu and CNET are selections in the Rule Breakers growth-stock newsletter service. Yahoo! is a former Motley Fool Stock Advisor recommendation. Find out why with free 30-day subscription offers to any of the premium research services.  

Longtime Fool contributor Rick Munarriz has been to mainland China just once, but he's longing to brush up on Mandarin and make it another go in the future. He does not own shares in any of the companies mentioned in this story. Rick 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.