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.

Last year, Warner Brothers reportedly introduced cut-priced DVD versions of its Hollywood movies for 22-28
yuan (2.7-3.4 dollars) in China. The price cuts were a direct attempt to compete
against pirated versions of the same movie which sell in supermarkets for as
low as 5 yuan (about 60 cents).

However, MSNBC reports that
less than a year later, Warner is further lowering its Chinese prices once again, by about 50%, to
12 yuan ($1.50). The new cut-rate releases, called “simple pack” editions,
contain cardboard packaging and few special features, compared to the typical
plastic DVD case and loads of special features like deleted scenes and
director’s commentary.

US film companies are betting that the Chinese population is ready to accept
paying a premium for legitimate Hollywood DVDs. Indeed, as the urban middle
class becomes more affluent, they will naturally want, and can now afford,
luxury items like DVDs. Through the internet and the Westernization
of China’s middle class, Chinese interest in Hollywood films is increasing. For
years now, Chinese films have stood alongside Hollywood films in Chinese video
rental stores. With the government allowing only 20 Hollywood movies to be
shown per year in theaters, and a general dearth of theaters, watching DVDs
(and VCDs) at home is the way in which most Chinese consumers are able to enjoy US (and Chinese) films.

Despite favorable conditions for Warner Brothers to sell its
DVDs, it’s unlikely that Chinese consumers will switch from buying pirated DVDs
to legitimate copies. For one, the price point for DVDs, at about 5-7 yuan, has
been ingrained for years. Also, the quality and packaging of pirated DVDs are
currently very comparable to what Warner is offering. So, while a growing number of Chinese can certainly afford twice what they currently pay for DVDs, they have little incentive to do so.

In the West, some incentive for purchasing legitimate goods arguably stems from a culturally instilled sense that purchasing pirated goods is moral and legal wrong. However, in China, these ideas are nascent, if they exist in any meaningful way at all. Buying pirated content is the norm, and finding a legitimate copy of
media is the exception.

So unless Warner can convince consumers that its product is
superior to pirated versions, either through incentives, moral justification,
or legal pressures, it’s unlikely that they will have success selling their
product at twice their competitors’ price.

A pair of companies taken to court for internet film piracy offered a unique defense, telling the court they are guilty but saying the owner of the movie they made available on the Internet was asking for too much compensation.

Today’s talk with Peter Yu, sponsored by the Digital Media in Asia Project and Harvard Law School’s East Asia Legal Studies Program, will be webcast at 12:30.  Please vistit the Berkman Center homepage for more information and for a link to the webcast.  It’s in Real Audio format (unfortunately) so if you don’t have a Real Audio player you can download one here: www.real.com.

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.

An interesting news article about China’s digital media situation.

Some interesting snippets from the article:

“I would like to plant this challenge: by 2008, to have more
legal than illegal DVDs sold in China, to have more American
movies in Chinese theaters and to have more Chinese movies in
American theaters,” says Dan Glickman, CEO of the MPAA.

“It is virtually impossible to find counterfeit Olympics
goods in China. Why? As one of the Chinese officials said, it
is because fakes dilute the value of the logo, the intellectual
property upon which the Chinese have invested to finance the
games,” he continues.

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.”