China's fledgling online music stores are trying to gain ground from the pirates

-------By Daniel Inman

The same revolution that digitized the way we work is now transforming our music into a digital medium. The increased availability of both high-speed Internet and portable MP3 players has made digital music into a serious threat to the more traditional CD. The Chinese Internet Network Information Centre (CNNIC) has reported that 45 percent of Chinese Internet users use the net to search for, or download, music. With such a large chunk of the Chinese Internet population turning to the Internet for their music, the question is not so much whether digital music will affect the traditional means of distributing music, but more how it will happen and whether it can be an opportunity to make selling legitimate, non-pirated music a profitable enterprise in the face of China's endemic problem with piracy.

There is optimism that such a breakthrough can be made. The director of the Chinese Audio and Video Association, Liu Guoxiong, announced at the end of May that he expects the market value of digital music in China to reach RMB12.7 billion by 2010. And there is no shortage of investment: in the six months from October 2005 to March 2006, RMB700 million was invested in the sector.

Such investments are up against China's pirate music market, which is so pervasive that the International Federation of the Phonographic Industry rates it as one of the world's worst offenders, where 85 percent of all music sold is copied (and this doesn't include the music that is illegally distributed for free over the Internet). This creates a pirate market worth US$411 million annually.

If anything, increased access to the Internet has made pirating music much easier. Therefore, anyone who wants to make a profit out of legitimately selling music online in China will have to offer something extremely attractive to customers who are getting used to downloading their music for free.

Innovating, protecting

One company that might have the right package is Huaqi, China's biggest manufacturer of MP3 players, which they sell under the Aigo brand. Last year they created Aigo Music, a website that sells music at a blanket price of RMB0.99 a song. It has an extensive catalogue, which is the result of partnerships they have brokered with two of the world's biggest record labels, Warner Music and Universal Music. The question is: who will use their service, if they can get the same product for free elsewhere?

Jason Yin is the managing director of Instat China, a research company that has conducted one of the most extensive investigations into the future of digital music in China. He says that people will be going to sites like Aigo Music for the convenience they offer. "A small subset of consumers will pay for music online if the service is good. It's mainly middle-class professionals, people who don't have the time to search for music. They don't want to have to deal with broken links and the risk of viruses. But this is a small subset.

The number of middle-class people in China is 70 million. Not all of them of them are going to use these services, but if just 1 or 2 percent do, that's a big market." He adds that professionals, who may well use the service, stand in contrast to students, who have a high demand for Internet music but also have more time to search for free copies.

Huaqi's strategy bears a striking resemblance to Apple's: in the same way that Apple has its own hardware, the Ipod, and its own online music store, Itunes, Huaqi has its Aigo MP3 players and the complementary Aigo Music shop. This, Yin says, could be vital, "Aigo Music has a higher probability of succeeding than other companies, because people are buying for convenience and they will want synchronization between the online store and their music playing device. This is a more interesting proposition than just legal downloads."

Even if Aigo Music is successful, its success will be attained by attracting a small niche of the music-downloading public. The real breakthrough, though, would be if they were able to capture a broader range of the market. One venture that is trying to achieve this is Tailenet, a website owned by the record label, Taihe Rye Music. On their website, they only sell the songs of artists who are signed to their label. They sign up big names, such as 2005 Super Voice Girls winner Li Yuchun, and release their songs exclusively on their website before they are available on any other media source, with the expectation of selling an extremely high quantity in a short period of time to fans desperate to hear new songs. Four of their twenty singles that were released in the last year were downloaded over 200,000 times for RMB3 each, over a two-week period.

To protect their songs during the crucial period of exclusivity, Taihe Rye has reached a deal with Baidu, China's largest search engine, so that anyone searching for one of these exclusive songs, during the first two weeks of their release, will be directed to a legal download site. This agreement is an important development, but Yin says this means of beating piracy is limited. "Baidu can get a share of the profit if they link people to legal downloads, but at the same time, if they stop allowing people to search for copied music, their core business will suffer and people will use other search engines. They need to balance the pressure between gaining profit from the record companies and the demands of their users. That is their dilemma."

Enforcement effort

There is a limit to how effectively companies, acting alone, can protect their interests. If a market conducive to the selling of online music is to be created, it must be done by the efforts of the Chinese government, something that has hitherto been lacking. "The major problem in China is not a lack of legislative measures to protect IP rights, but a lack of willingness to enforce the law and impose sufficient sanctions on counterfeiters," says Olivia Luzi, a lawyer at Salans law firm specializing in intellectual property and IT law.

"Another issue is the disproportionate cost that copyright owners must bear to bring legal actions, for results often disappointing in terms of fines or the amount of damage awards."

When Baidu lost a lawsuit over linking to free downloads last October, it was only required to pay RMB68,000 in damages; a fine that will hardly act as a disincentive for a site that receives a quarter of its traffic from people searching for sites where music and movies can be downloaded illegally. Maybe search engines shouldn't be the main target of legal action: "If an Internet search engine does not link to illegal download sites anymore, it does not necessarily mean that those websites do not exist anymore," says Luzi. "Each illegal website that has been closed down is more likely to be replaced by one or several other illegal websites."

The legitimate online music industry is waiting for the government to start effectively punishing the pirates. Until then, websites like Aigo Music and Tailenet will have to operate in an extremely tough market. The websites that survive will be the ones who are able to create innovative packages that attract the consumer away from the pirates' sites; and they will do so with the help of Chinese musicians, who are embracing online distribution because they're receiving no revenue from traditional music sales. What's certain is that the number of people acquiring their music online will continue to rise. What's less certain is whether they'll be paying for it.