ENTERTAINMENT: Baidu Eyes Sale of Piracy-Plagued Music Unit

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Bottom line: Baidu’s reported plan to sell its online music unit looks like a smart way to rid itself of a controversial piracy-plagued business that holds little value for its main strategic focuses going forward.

Baidu set to dump music unit?

In what could be a move that’s long overdue, leading search engine Baidu (Nasdaq: BIDU) is reportedly eyeing a sale of a music division that was once one of its major attractions but in recent years has become more a liability due to frequent accusations of copyright violations. Baidu wasn’t commenting on the reports, but such a move would be consistent with its recent diversification into a range of new areas, none of which include music as part of their core business.

Such a deal, if it’s really in the works, probably wouldn’t be worth too much, perhaps in the $100-$500 million range at the very most. More significantly would be the disposal of a unit that in the past has come under fire for allowing rampant piracy through illegal peer-to-peer (P2P) trading of copyrighted music.

Music is one of Baidu’s oldest businesses, even though the company is better known for its core search services. One of its most popular services in its earliest days was a P2P music-sharing service, which attracted not only millions of web surfers looking for free music but also lawsuits from some of the world’s biggest music companies over copyright infringement.

Baidu later downplayed the P2P service and even launched its own service selling legal music 3 years ago after signing agreements with several major record labels. (previous post) But it continued operating the P2P site, and to this day music services still remain as one of the main choices on its search engine homepage.

Now the latest media reports are saying that Baidu is in discussions to sell the music business to a recently formed company that operates the site trmusic.com.cn. (Chinese article) The reports say a formal announcement on the deal could be coming soon, though there’s no addition detail.

Focusing on Other Areas

Such a sale would be consistent with Baidu’s recent push into other services outside its core search area. Those include online travel services through its controlling stake in website Qunar (Nasdaq: QUNR), as well as video and group buying services through its iQiyi and Nuomi units, respectively. More broadly speaking, Baidu founder Robin Li has said he believes the future lies in online-to-offline (O2O) services, and that he plans to spend aggressively to build up those businesses.

Music doesn’t fall into any of those categories, and the service’s checkered past would make it a logical asset for Baidu to sell at this point. Baidu isn’t the only company to come under fire for piracy allegations, which have dogged most of China’s major Internet companies at one time or another.

Leading e-commerce company Alibaba (NYSE: BABA) found itself at the heart of a piracy scandal early this year, when a Chinese government survey found that nearly two-thirds of the goods traded on its popular Taobao online marketplace were fakes. Baidu itself also came under another attack 2 years ago, when it got sued by online video rivals Youku Tudou (NYSE: YOKU), Sohu (Nasdaq: SOHU) and Tencent (HKEx: 700), and also the major Hollywood studios over allegations of piracy on its video sites.

At the end of the day, piracy issues will continue to create headaches for many Chinese Internet companies as they grapple with third-party trading in copyright-protected goods on their sites. In cases like Alibaba’s, the company really has no choice but to try to fix the problem since Taobao is one of its core businesses. But in cases like Baidu music where the problematic asset is less important to its core businesses, a sale of the unit may become the most prudent way to make the piracy issue disappear.

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