Can the piracy-ravaged Chinese market represent a sales opportunity for record labels after all?

Sparking such hopes is a licensing agreement between One-Stop China, a joint venture of Universal Music Group, Sony Music Entertainment and Warner Music Group, and Baidu, China's dominant online search engine and a longtime thorn in the side of the recording industry for providing links to infringing music.

Under a deal announced July 19, Baidu will provide its users with free ad-supported music streams from the three majors and has agreed to remove links to unlicensed copies of their music on third-party sites. Registered users can also download up to 100 tracks for free. Once they reach that limit, they can sign up for a subscription music service that Baidu plans to launch later this year that will charge them a monthly fee for unlimited downloads and other premium services, including a possible cloud-based locker.

It's a bold proposition in a market where most music fans download music illegally or purchase cheap counterfeit CDs. But Baidu, which also has a licensing pact with EMI Music, believes its mix of ad-supported free music and paid services will appeal to consumers.

"With the right incentives, with the right value-add," company spokesman Kaiser Kuo says, "we're hoping we'll be able to incentivize people to pay for something."

Max Hole, a One-Stop China director and COO of Universal Music Group International in London, hails the agreement as "a landmark deal," expressing the hope that converting Baidu into a licensed service for major-label music could level the playing field for other legal services in China.

But with major labels accounting for only a minority of total Chinese music sales, their licensing deals with Baidu represent just one step in what's likely to be a long, hard slog by international and domestic artists, labels and music publishers to generate meaningful revenue from the market.

The trade value of music sales in China totaled just $64.3 million in 2010, down 14.9% from a year earlier, according to IFPI, which ranked the world's second-largest economy only 27th in terms of music sales, placing it between Ireland and Turkey.

Even though the major labels' rosters include top stars who sing in Mandarin and Cantonese, they make up a relatively small portion of the overall China music market. Universal, Sony and Warner accounted for only 34.9% of recorded-music sales in 2009, according to estimates published in January by London-based research and consulting firm Informa Telecoms & Media. (EMI scaled back its presence in China in 2008 when it sold its stakes in two Chinese joint-venture companies.)

What's most encouraging about the Baidu deal aren't the immediate rewards for the labels but rather the changed tone of the dialogue between the search giant and rights-holders, says Ed Peto, managing director of Beijing-based music business consultancy Outdustry.
"Until recently, Baidu has been almost exclusively run by technologists with a focus on product and audience development at the expense of copyright," Peto says. "This deal suggests Baidu is ready for a more progressive relationship with the music industry."

Baidu isn't the first major Internet company in China to offer free, fully licensed access to music from all four major labels. Google has operated a Chinese music service since 2008 with local partner Top100.cn, which has deals with all of the majors.

Gary Chen, co-founder/CEO of Top100.cn parent Orca Digital, says Baidu's deal with the majors is a positive development for other legitimate music services, which he says have also benefited from recent government efforts to crack down on infringing websites.

Top100.cn is planning to launch a subscription download service later this year geared toward mobile users, who contend with high data charges and may welcome a budget-friendly alternative to the cost of streaming music over their phones, Chen says.

"The mobile Internet is exploding," he says. "It's a crucial moment."

Do China's chronic challenges with piracy mean it's likely to remain a minor music market?

"I see something bigger than that," Universal's Hole says. "Does that mean it will catch up with the U.S. or Japan? Certainly not. But I'm now starting to feel that in the next five years, this could start to be significant."

Questions? Comments? Let us know: @billboardbiz

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