Hollywood, Rivals Ambush Baidu With Piracy Lawsuit

Baidu snared in video piracy lawsuit

In what looks like a highly coordinated ambush, a group of China’s top online video sites have teamed up with Hollywood to sue Internet search leader Baidu (Nasdaq: BIDU) for video piracy. This is the first time I can recall seeing big western names team up with Chinese companies to launch such a major lawsuit, creating not only legal headaches but also a huge wave of negative publicity for Baidu. The action also comes as Baidu makes a series of major moves in the online video space in a bid to challenge industry leader Youku Tudou (NYSE: YOKU), which is also one of the co-plaintiffs in this new lawsuit.

So what do I make of all this? If I were a war strategist, I would say that this looks like a brilliant move by not only Youku Tudou, but also online video operators Tencent (HKEx: 700), Sohu (Nasdaq: SOHU) and LeTV (Shenzhen: 300104), which are also co-plaintiffs in the suit. By joining an alliance with the Motion Picture Association of America (MPAA), which represents all the major Hollywood studios, the Chinese plaintiffs are gaining a powerful ally in the film industry.

Equally important, the MPAA by joining this lawsuit is implicitly endorsing all of these co-plaintiffs as important partners in the war against piracy. Baidu has clearly become the odd man out, and this latest lawsuit follows a series of similar major complaints over the years against the company for allowing music and printed material piracy on its sites. This loud new complaint against Baidu didn’t seem to affect the company’s stock, which actually rose about 2 percent in trading after the news was announced at a high profile press conference in Beijing.

All that said, let’s take a look at the details of the lawsuit to try and better understand the situation and its longer term implications for Baidu. The plaintiff group, which also includes Wanda Group, one of China’s largest theater operators, is suing Baidu for operating 4 sites that provide links to pirated video content. (lawsuit announcement; Chinese article) The plaintiffs seeks 300 million yuan, or about $50 million, in damages.

The action looks at least partly aimed at stopping Baidu’s rapid rise in the online video space, which could challenge traditional TV in the next 5 years and thus has big potential. Earlier this year Baidu purchased online video site PPS for $370 million, combining it with its own iQiyi service to create the nation’s second largest online video company behind Youku Tudou. Baidu also rolled out an Internet TV product in partnership with TV powerhouse TCL (HKEx: 1070; Shenzhen: 000100) in September. (previous post)

Historically speaking, Baidu and many of China’s other top Internet companies were well known for allowing frequent piracy on their sites. Baidu operated a popular music swapping service that allowed users to download many pirated songs, and the company was also sued by a group of domestic authors for allowing unauthorized versions of their works on its sites. Baidu has made an effort to clean up much of that activity and was even removed from a US list of “notorious” pirating sites; but clearly the problem remains.

As to longer term implications, none of the previous lawsuits against Baidu seemed to have much impact on its meteoric growth, so the same could also be true in this instance. The one difference this time is that Baidu clearly has big plans for iQiyi, and I suspect those plans could include an IPO for the unit in the next 2 or 3 years. Thus this lawsuit could hurt iQiyi’s reputation and attractiveness to investors if Baidu fails to address the issue. But I do expect that Baidu will now take steps to tackle the issue, perhaps convincing the plaintiffs to drop their lawsuit.

Bottom line: A major lawsuit against Baidu for video pirating is unlikely to inflict major damage on the company, but could negatively affect the image of its iQiyi service.

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