Bloomberg.com quotes one analyst as saying that “Baidu will be under a lot of pressure to stop offering links to illegal MP3 files and may have to stop their MP3 search service.” Stop offering links to illegal MP3 files? I don’t see it. Providing links to unauthorized content is a cornerstone of Chinese search engine revenue–not just for Baidu, but for all the Chinese search engines. A $12,000 fine is not going to intimidate any search engine; they’ll just chalk it up to the cost of doing business.

But they’re painted into a corner, and effectively, copyright owners have forced their hand. These search engines want to go legit and play ball with copyright owners. But if Baidu were to give up its MP3 links, as the analyst quoted above suggests, they’d be committing suicide. The other Chinese search engines would gladly take Baidu’s share of the music search traffic, administrative fines and all. Copyright owners are not going to win a shoving match with search engines.

But, in the words of Obi Wan Kenobi, “You can’t win. But there are alternatives to fighting.” For example, search engines have offered to give copyright owners a portion of their ad revenue in return for licensing the content, but the major entertainment companies will have none of it. Some Chinese record companies–like Taihe Rye, a successful domestic Chinese label–recognize that online piracy is a fact of life and business, so Taihe has made special arrangements with Baidu to clamp down on pirate links for the first two weeks after a new release. This allows Taihe to capture the majority of its expected revenue from a release while not eviscerating Baidu’s revenue or market share. $12,000 fines won’t do it. Frankly, even bigger penalties are unlikely to have much effect. But copyright owners have alternatives.

Berkman Tuesday Luncheon Series, Tuesday, May 30 – 12:30 pm
Berkman Conference Room, Berkman Center
1587 Mass. Ave., Harvard Law School, Cambridge MA

Guest: Eric Priest
Topic: Asia at the Cutting Edge?

Some believe Asia is at the cutting edge of twenty-first century entertainment industry business models. A combination of high copyright piracy levels and high-tech populations has led entertainment companies in places like China, Hong Kong, Taiwan, and South Korea to embrace the internet and emerging digital and mobile technologies as they seek innovative new revenue sources. This includes a massive new market for citizen-created media (music and movies) on the internet in China. What are the trends and are they really leading to sustainable business models for the rest of the world to emulate? Is the conservative state-run media in China creating a strong market for alternative, citizen-created Internet media and what are the implications for Chinese society, politics, and the entertainment industries? With all the emphasis on technology, is creativity increasingly an afterthought?

Eric Priest is a research fellow in the Berkman Center’s project on Internet Filtering, and a cofounder of Berkman’s Digital Media in Asia Project. He is also a visiting researcher at Harvard Law School, and an adjunct professor of law at Chicago-Kent College of Law.

Bio: http://cyber.law.harvard.edu/home/eric_p…
Digital Media in Asia project blog: http://blogs.law.harvard.edu/dmablog/

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Speaking privately to people in the Hong Kong entertainment industry last week, there is pessimism that these tactics will yield results. The fact is, they acknowledge, that young people view the likelihood of getting sued or arrested on par with the likelihood of winning the lottery.

I’m currently in Hong Kong attending the Music Matters Asia music industry conference, where, unsurprisingly, digital media and internet file sharing is the hot topic. The slogan of Day 1: mobile is the future.  The primary growth area (and really the only meaningful growth area) for music through 2010 is monetized mobile downloads.

Here are some highlights from yesterday’s panel discussions.  I’ll add info about more highlights over the next day or two.

-Major labels in Asia claim to embrace and look forward to digital, online music distribution as an opportunity more than a challenge.  I’m not sure if this was conference-induced exuberance or whether it’s a real sentiment (probably a little of both).  I’m also not sure whether this professed excitement is shared by the major label home offices in New York and London.  It would not surprise me if Asia executives were in fact more rosy about the future than their bosses because high piracy rates have historically forced music companies in Asia to be flexible and adjust to new situations, so embracing new revenue sources is natural for them.

-I thought the best panel of the day was “Meet the Neighbors,” the only non-music industry panel.  On this panel were executives from “neighboring” industries: videogaming/online gaming, television, and mobile communications.  They raised two of the most prescient points made all day.  First, one of the panelists remarked: I’ve been listening all day and I haven’t heard anyone talk about musicians.

1) Everyone talks about ringtones, downloading, market share, but what about the artists?  Cliche, yes, but it is an absolutely key point that the industry can only survive if people are able to connect and experience artists and technology and business models enable and encourage artists to create great music.

2) The industry has to get over it’s centralist, top-down mentality.  Music is not just what record companies distribute to passive consumers.  Consumers today want to create, and share their creations.  They want technologies and business models that enable that and are seeking and finding those regardless of what the business model record companies push.

Seeking to tap into China’s market of some 350 million mobile phone subscribers, Seattle’s Melodeo has formed a joint venture with Access China, a subsidiary of Access, a Japanese internet technology provider. The joint venture “will launch the first platform in China to deliver secure digital content through wireless operators and other mobile-service providers.” According to its website, Melodeo provides “an all-in-one mobile music system … to Mobile Operators. This system lets users shop for music on their mobile phone, download it to the mobile phone and listen to it anywhere or any time in high quality stereo.”

The enormous number of Chinese mobile phone users is no doubt enticing to companies like Melodeo. A fair number of pundits think mobile phone downloads is the killer app that will turn things around for the piracy-riddled music industry in China. Of course, in China the potential users of a wireless, for-pay music download service are probably a relatively small subset of the 350 million mobile phone users. Couple that with the fact that the price Chinese consumers are willing to pay for per-song downloads is something far lower than the 99-cent US price-point, and it might be a challenging business model to sustain. Of course, the biggest challenge to the music-over-mobile business model is unauthorized P2P file sharing, which is rampant in China, and threatens the future of any for-profit online (or mobile phone-based) music retail business model.

The following is an exclusive interview I had on 12/06/05 and 12/07/05 via e-mail with Mr. Jun Wu, President and CEO of R2G. R2G is a relatively new Chinese company that is in the forefront of piracy prevention in China. Most recently, R2G has through legal action successfully compelled major websites Baidu.com, the9.com, and 21cn.com to remove their links to unauthorized music content.

CHEN: How does R2G plan to reduce the impact of rogue BT
websites, rogue P2P file sharing software, and FTP servers that do not
distinguish between legal and illegal copies of songs?

WU: We will track each individual BT or P2P site down to
make sure that they do not distribute content that had registered with us.
According to the new Internet copyright bill that was introduced by the Chinese
government earlier this year, once we have notified these sites with the list
of illegal content, they will have to delist these content immediately. Our
tracking software is developed in house, and specific to each individual site.
It will be difficult for me to go into details one by one in an email.

CHEN: When a typical user is presented with a legit and
illegal venue, what will R2G offer to persuade him to pay more money for the
same song/movie? We’ve seen from the US that suing individuals for copyright
infringement alone isn’t an effective deterrent. Of course, offering a legal
venue will attract some users, but as long as a cheaper venue is available, how
does R2G plan to drastically convert users to legit methods?

WU: Our strategy is to focus on the service provider, be it
a search engine or a P2P service provider， making sure that it will be
increasingly difficult for an average consumer to be able to find illegal
venues to download pirated content. We believe that if we are able to cut the
current piracy rate from 95% to 50% (a ten fold improvement), it is more than
significant enough to make a big impact on the overall market.

CHEN: I understand that R2G has experienced success in
convincing large websites to de-list links to illegally distributed music. How
successful has R2G been in convincing smaller websites to become legitimate
distributors? What are the differences in strategy when dealing with smaller
websites, as opposed to larger sites?
 
WU: Even though we had not been focusing on the smaller sites very much,
generally we feel they are relatively easy to handle. Our experience so far had
been that the medium sized websites are the most difficult ones to deal with.
The logic is quite simple. In converting ones website from pirating to legit,
there is always this issue of timing. So these medium sized sites are always
afraid that they will loose traffic during the process of turning legit,
therefore loosing the possibility of ever competing against the big ones.

CHEN: Regarding P2P file-sharing, how does R2G plan to track and curb P2P
file-sharing? Are there any estimated percentage breakdowns of where a typical
Chinese person gets his music, movies, and other digital entertainment? (Legal
physical copies, legal online downloads, illegal websites, illegal P2P, illegal
physical sales, etc) Does R2G have any plans to turn P2P into a profitable mode
of file distribution?

WU: Yes, we are indeed working on the P2Ps as well. We hope to bring some good
news to the market around the Chinese New Year. The plan is to install a layer
of filtering function with our P2P partners so that R2G registered content may
not be pirated in amongst these P2P site/communities. The first batch of these
P2P sites all has a centralized server. We are working on ways to offer similar
functions for the Freenet like P2P community.  We believe that once one
can control what can be distributed amongst a P2P network, then there are many
ways to turn this into a profitable business. However, I don’t have any info
regarding the distribution at hand. My estimate will be, most of the younger
generation download their music from the Internet either through a search
engine or a P2P site.

CHEN: What demographics do the Chinese entertainment industry view as its
greatest asset and liability? What actions are entertainment companies taking
to maximize revenues from these assets and limit losses from the liabilities?

WU: The young generation (15-35) is clearly the main market for entertainment
content (especially in the case of digital distribution). In a way, they are
both asset and liability.  If the collective service offering is
acceptable to this segment, then there is enormous potential, otherwise it is
going to be an uphill battle.

CHEN: How does R2G and the entertainment industry plan to
scale their business model to serve college students, who typically have less
expendable income?

WU: Currently it is not on the top of our to-do list. Once
the overall piracy rate in the public network is reduced to a certain level we
will start addressing these niche market too.

What are Chinese companies doing to protect their intellectual property online?

To supplement governmental enforcement efforts, private companies, like R2G, have formed to help protect their clients’ intellectual property. According to Jun Wu, CEO and founder of R2G, via an e-mail interview, their strategy is to “track each individual BT or P2P site down to make sure that they do not distribute [their clients’ copyrighted] content.”  R2G will try to persuade these service providers to adopt a business model that compensates the copyright holders or else face lawsuits. The reason websites offer links to free media, Wu says, is mainly to attract traffic. Therefore, the hardest sites to convert are the medium sized ones because they are “always afraid that they will loose traffic during the process of turning legit, therefore loosing the possibility of ever competing against the big ones.”

Wu’s philosophy is that as R2G converts rogue websites to legitimate distributors: “It will be increasingly difficult for an average consumer to be able to find illegal venues to download pirated content,” and thus, users will switch over to legal sources. Of course, R2G is hoping that they can convert existing websites faster than new ones appear. R2G plans to focus on tracking public sites first, leaving potent niches like university networks and private FTP servers unexamined for the moment.

R2G has generally received favorable court opinions when suing websites for copyright infringement. They successfully forced China’s most popular MP3 search engine, Baidu.com, to remove thousands of links after filing an infringement lawsuit against the website. Shortly following the Baidu case, R2G sued similar websites, the9.com and 21cn.com, both of whom soon removed their links to pirated content.

The South Korean government has announced plans to pour US$90 million into the failing Korean music industry, which it claims is slumping due to the “rapid growth of digital music market and emergence of diverse high-tech music-listening devices.”

As part of the initiative, the government will expand its definition of the “music industry” to include not only record labels and live musical performances, but also “virtually every area regarding music, such as music education, production of musical instruments, performances by underground music bands, music management, online and offline circulation of music and ‘noraebang,’ rooms hired for karaoke singing.”

According to a study by market researcher TNS, almost 20% of mobile phone users polled in a 15-country study now listen to music on their cell phones, compared with 15% listening on home stereos and 10% on dedicated digital music players like an iPod. The US trailed others in adopting music phone technology, with a mere 4% listening to music on their phones. More daunting for proponents of music phones in the US is that a separate study suggested only 10% of US mobile users are highly likely to purchase a music phone. In Hong Kong, 23% of mobile users listen to music on their phones, while 19% do so in the UK.

South Korea was #1 in the study with 26% listening to music on cell phones and a whopping 60% choosing mobile music as one of the five applications they would like to start using, or use more of in the future. “This puts mobile music in top place as the application with highest potential. This figure is highest amongst mobile users in South Korea (60 percent) and Sweden (46 percent). Once again, the U.S. ranked last in the study, with only 19 percent of respondents stating that they want to start listening to music on their cell phones.”

The difference might be due partly to a bit more of a Luddite culture in the US (Rebecca MacKinnon has recently blogged about how the cell phones in China are higher tech and more multimedia focused than those in the US), and the fact that digital music phones have (amazingly) only been available in the US for a few months. But I think this might also suggest a difference in US and Asian consumption habits. One thing that has made iPods popular in the US is that people can use them to manage and transport their entire music collection; they can be mixed and matched with all kinds of equipment–home stereo and car stereo–in ways that it seems cell phones are unlikely to be able to, at least for some time. The US’s car culture, if nothing else, is reason to imagine that iPods will continue to dominate the digital music scene here, while that obviously would be much less of a factor in Asia, where most people do not commute by car.

The CEO of Singapore-based Soundbuzz, Asia’s largest digital online and mobile music retailer, says they are preparing to launch the service in Mainland China, where online and physical piracy is ubiquitous. According to Soundbuzz’s CEO, the challenge is formidable but there’s reason to be hopeful a legitimate music download service will catch on in China. “The Chinese spend on mobile music, gaming, matchmaking, and all sorts of online services. The culture of paying for products there is not as alien as people would have us believe.”

The article goes on to observe,

Asia is going to continue to play the central role in the development of the nascent digital music industry. “The new business models in Asia are dramatically different from those in the West.” The US$4 billion Ringtone business is being replaced by “Truetones”, “Mastertones” and “ring-back tones”, all Asian developments. “Interaction with music is changing dramatically. Even ten years ago, the primary aim of music was to entertain. Now with digital music, a lot of music utilization is for expression. Asia is leading that.”