SHANGHAI (Reuters) - Baidu Inc, China's largest search engine, has signed an agreement with top music studios to distribute licensed songs through its mp3 search service, ending years of legal dispute over charges that the company abetted piracy.
Baidu signed the deal with One-Stop China, a joint venture by Universal Music, Warner Music and Sony Music, for its catalogues and new releases that can be streamed or downloaded from Baidu's servers. Baidu also launched, Ting, a social music platform.
The deal is significant for the recording industry that has seen little profit in China where piracy is endemic and pirated movie DVDs and music recordings are sold for under a dollar.
Music studios have long accused Baidu of spurring piracy via its mp3 search that provides links for users to download pirated music. Earlier this year, the U.S. Trade Representative office named Baidu as a notorious market for piracy.
"It's an important step forward for Baidu now to be working with three of the major companies on a licensed model in China," said Frances Moore, chief executive of the International Federation of the Phonographic Industry (IFPI), which represents the recording industry.
"This looks promising for the development of a legitimate digital music business in a market that has for years been largely dominated by piracy."
The move by Baidu to legitimize its music search is part of a broader trend in the Chinese Internet space, where online media firms such as Youku, Tudou and Ku6 Media vie for the right to buy and stream legitimate content.
"This deal is really about Baidu evolving its business," said Michael Clendenin, managing director of RedTech Advisors.
"It's no rinky-dink start-up that can simply turn a blind eye to what's going on. It's big enough to go legit on MP3 and turn it into a platform with a more convenient user experience."
Analysts said Baidu's shares could see a short-term boost on the news, but cautioned against projecting too much importance on it at this early stage.
The Nasdaq-listed company's shares have more than tripled in value since Google's partial withdrawal from China in early January 2010.
Under the terms of the deal, Baidu will remunerate music content owners on a per-play and per-download basis for all tracks delivered through its mp3 search and Ting platform.
The licensed music will be supported via advertising and the music studios will receive a minimum revenue guarantee against the songs streamed or downloaded.
If the advertising revenue exceeds that amount, a revenue split will kick in. If it doesn't, Baidu will still make the payout, said Baidu spokesman Kaiser Kuo.
Baidu is in the process of uploading the music catalogues onto its servers but the firm will not conduct a clean-up of the mp3 search site, meaning links leading to illegal music will remain for now.
Kuo said in the long term, Ting will be Baidu's only music offering which the firm aims to monetize by providing value-added services.
Currently, a search for popular music titles on Baidu's mp3 search brings up a mix of legal and illegal download links.
Baidu said the agreement with One-Stop China was accompanied by a conciliation agreement endorsed by the Beijing High People's Court that ended outstanding litigation between all parties involved in the deal.
Analysts said although the deal is incrementally positive, it could see Baidu paying more for content and the firm may not be able to generate revenue from Ting in the near term.
"I think there will be a higher cost involved and I'm not very sure they can generate the revenue," said Wallace Cheung, a Hong Kong-based analyst with Credit Suisse.
China is the world's biggest Internet market by users with over 485 million netizens. Searching for music is one of the top activities Chinese users do whilst online. There were 381 million online music users by the end of June, according to government data.
Earlier in the year, Baidu signed an agreement with the Music Copyright Society of China (MCSC) to pay fees to MCSC for every song downloaded using Ting. Baidu already has an agreement with EMI Group through the one with MCSC.
Baidu also recently removed hundreds of thousands of infringing links from its Baidu Library product after a group of Chinese authors accused the search engine of not respecting copyright laws.
China's search market grew 62 percent in the second quarter to 4.3 billion yuan, with Baidu capturing 75.9 percent of the market.
Reporting by Melanie Lee; Editing by Ken Wills and Vinu Pilakkot