Baidu plots to divide and conquer music industry

Killing three generals with two peaches

The following article by Zhang Zhiyuan was translated from the original Chinese article by the Music 2.0 blog.

The article, and an introduction by the translator, are republished here with permission.

China’s rogue search engine Baidu has recently come under intense attack from a large swathe of the music industry including government appointed bodies like the Music Copyright Society of China (MCSC), the China Audio-Video Copyright Association (CAVCA) and domestic labels joining forces with international major labels and publishers in an unprecedented alliance against it calling on advertisers to refrain from advertising on Baidu.

With its advertising lifeblood under threat, Baidu has attempted a divide and conquer strategy against the labels by announcing a partnership with 3 labels – Ocean Butterflies, Emperor Entertainment Group and Shanghai Huayi Group wherein it will be sharing advertising revenue on streaming music and music videos with them, though significantly, revenues from controversial mp3 downloads are not part of the equation.

For dramatic effect, Baidu claims to have lined up an advertiser willing to put up a pool of more than RMB 10 mil (US$1.5 mil) which will be used for this revenue share, but has not even mentioned the advertiser’s name – and it is open to question if this advertiser even exists. In all probability, this announcement seems like a blatant attempt to deflect the music industry alliance’s call to advertisers to boycott Baidu.

It is most likely that Baidu is actually dipping into their huge revenue pool and taking out a small portion to give to these 3 labels, but this very act acknowledges the fact that they do realize that labels are due their cut and contradicts their previous claims to the contrary. So if they are only limiting it to just their so-called Baidu Digital Music Alliance including the 3 labels, surely that implies that they are hoarding the remainder of their ill-gotten revenue pool which belongs to other labels.

So the manoeuvring and timing of this announcement shows that Baidu is clearly buying off 3 labels in an unsustainable manner with expensive advances rumored to be in the seven figure region (in Chinese yuan) each, simply to boost their position in the impending legal cases and to subvert public opinion – with no positive motivations towards the music industry at large. In fact, unless they extend similar revenue share deals along with compensation to all other affected labels for the sustained acts of infringement over the years, the true significance of this announcement is that their advances to these three labels have instead just created a precedent for suitable compensation claims for each label suing Baidu currently!

The following is the English translation of a great analysis of this latest development in the Baidu saga with kind permission of Beijing Digital Music Consulting, first published on the Sina.com in Chinese:

(My last article Labels Finally Strike Baidu’s Vital Points had been blocked by Baidu but is still available via Google, Soso, Yahoo, iask, Sogou and other search engines)

News announcement: Baidu recently revealed that it has received the first RMB 10 million plus advertising payment for Baidu’s “Digital Music Alliance “, which will start from July implying that over 70 labels in this alliance will get over 8 to 10 times of the previous revenue share. Also, Baidu claimed that if all goes well, in a few years the revenue earned by this alliance will exceed that of the alliance of major Chinese websites (RMB 40 million per year)

Baidu’s ploy to sow mistrust amongst labels based on the “Kill 3 Generals with 2 Peaches” strategy

This news is quite timely as it seems to have come about as a result of the legal action against Baidu initiated by the recent music industry alliance. However, such a response from Baidu against the three major music associations – MCSC, CAVCA & IFPI – is unwise. It merely seems to be a public relations tactics and not a strategic solution – and will only serve to increase the conflict between two sides.

Baidu’s reaction can be likened to toothpaste being squeezed out of a tube in reaction to pressure from the labels’ actions. Before the music industry alliance collectively sued Baidu, it had no motivation to attract greater advertising revenue. Now it seems that in reaction to the alliance’s efforts, Baidu has somehow easily extracted a portion from their pool of over RMB 100 million ad revenue, and with even more effort, they claim that RMB 1 billion is possible too.

Till now, Baidu has not acknowledged the magnitude of the problem, and marking their lack of sincerity, they have resorted to the strategy of sowing the seeds of mistrust among labels in “Kill 3 Generals with 2 peaches” fashion.

Baidu’s practiced logic has become,

“I stole one billion yuan from all of you, but since I am a rascal/ scoundrel, no one can do anything about me. So I will take out 10 million out of 1 billion yuan and whichever label gives in first by surrendering and promises not to accuse me, I will give them some money, but whoever insists otherwise, not a cent will be given out to them.”

Such a move by Baidu is bound to frustrate the music industry. As a dominant player in the online music industry, Baidu certainly needs to show greater social responsibility. A more sincere way for them to deal with the labels is to provide a solution that will satisfy all copyright owners’ needs instead of providing limited scraps of money for a few labels to fight for. This kind of treatment of the labels can be likened to teasing a monkey. It can only serve to make most labels angry and force those who are insisting on legal content distribution more determined to sue for further compensation. Otherwise, those pursuing justice will get nothing, which is very much against the concept of a harmonious society as well.

The labels are not satisfied that Baidu offers revenue share of ads for streaming music webpages only

Let us suppose that the labels accept Baidu’s model of “ad revenue exchange for copyright”. Then, all music companies should ask for a share of all of Baidu’s mp3 channel ad revenue, in addition to all key word searches related to music in other Baidu pages and channels, instead of only the ad revenue from the streaming pages assigned to the digital music alliance. The scope of revenue share is now a major point of dispute between Baidu and the labels. The labels generally think that the money offered to copyright owners is only a small fraction when (it is known that) the whole amount is at least a hundred times this.

Of course Baidu likes to say that “although the mp3 business brings huge page view traffic, the scale of revenue is still not big”. However the music industry response is that, if this were case it shows up Baidu as not only failing to attract advertising, but also emphasizes their limited ability to run the music business too. This excuse cannot be accepted and theoretically it can be described as,

“You stole my money, but when I ask you to give it back, you say that you have used the money to run a business and you are running a loss now, so now you claim that you only can give me a small sum of money.”

To earn profits from the music business is not an easy task and taking into account the (illegal) circumstances, it is possible that Baidu has been constrained in this area. Otherwise, given Baidu’s platform reach, if they were more focused on running it more effectively, they could possibly earn more profits for the greater benefit of the music industry. For example, they could open up their whole platform and integrate services like Baidu Post Bar, music Zhang Men Ren , Baidu blog etc.

The record labels can then have their own promotions on these pages with event or activity marketing which will be able to attract much greater major brand ad revenue than having just simple display ads.

Only when Baidu solves this dispute regarding copyrights will advertisers who have a comparatively greater sense of social responsibility feel assured enough to place their ads on Baidu. If Baidu can improve for the better, with its platform advantage, it should not be difficult to share several hundred million yuan with the music industry each year.

However, Baidu’s current calculation on (traffic and revenue) data with regards to the labels is surely not very scientific, and a necessary solution would be to find another trusted company who can monitor this data fairly.

The revenue from music on Baidu could be derived from the following areas:

Bidding for music related key words for search ranking, and key words matched with text ads are two major areas – with the other sources being image ads, text link ads, streaming player ads etc.

However, the most dissatisfactory aspect is Baidu’s offer to share only the ad revenue on music streaming with labels. Even though the streaming revenue share is offered, critically, the fee for music downloading is not solved. Streaming is streaming, downloading is downloading – the two rights are not the same. The key problem remains the monitoring of the frequency of music streams listened to by users. Most labels (belonging to Baidu’s digital music alliance) only receive less than one hundred yuan per month which is unlikely to be true revenues, so they do suspect that Baidu is cheating in the accounting. So Baidu also needs to make their revenue accounting more transparent and public, by opening up its back-end data access to a third party to monitor in order to earn the public’s trust.

Legalization doesn’t necessarily mean that consumers have to pay

Many consumers mistakenly assume that the argument between Baidu and the labels is about whether music they consume should be charged to them or remain free. In fact, legalizing Baidu’s mp3 doesn’t necessarily mean asking consumers to pay. Consumers in future could still have a free legitimate music download service, with a better quality of downloaded music than the present system.

The labels think that Baidu has profited enormously using their songs, but has not shared any of this money with them and copyright owners. They are willing to try out new methods but Baidu does not have any sincerity. Baidu’s piracy has damaged the interests of copyright owners and legal web sites and especially dampened the enthusiasm of music creators, which will eventually lead to the shrinking of the music industry. This is also the reason why everyone feels that good songs are becoming fewer in number in the market now.

For consumers, music could possibly be consumed in various ways in future. Some can choose to view ads in order to listen to music for free, and bigger fans can opt to pay for better quality service. What the labels want is for the market to develop in an orderly and healthy fashion, but not by sacrificing the interests of general consumers.

Instead, Baidu’s only interest now is for quick returns, and consumers simply cannot fathom the struggles the labels’ are undergoing in this situation, with many enthusiastic musicians putting in great effort towards music production but getting nothing back in return. This should not be tolerated in a harmonious society. It can be likened to protecting a rare animal from extinction, failing which no one will work on music production earnestly, with a discontinuation of investment in this area which could tragically result in the Chinese music industry dying off.