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In an effort to boost its market share in China, Google (Nasdaq: GOOG) is reportedly in the final stages of a deal 
with Universal Music Group that would enable the Internet search giant to provide free music downloads to Chinese users.
Google, the No. 1 search engine in other large markets such as the U.S., significantly trails Chinese search site Baidu in China. Baidu owns just over 60 percent of the market there; Google trails significantly at less than 26 percent.
Citing sources close to the negotiations, The Wall Street Journal reported Wednesday that two other global music labels -- EMI and Sony BMG -- are also being courted by Google and venture partner Top100.cn, an online music retailer out of Beijing. Warner Bros. is also said to have indicated its interest in the project.
The deal would see Google and Top100.cn offer Chinese users free digital music downloads and other services, including free access to a database containing information on their favorite performers such as concert details, links and special ring tones. It is not known whether the music downloads and service will encompass the recording labels' full catalogs or simply tracks from Chinese artists.
For their trouble, the music companies will reportedly receive royalties based on individual revenue-sharing models being negotiated with Top100.cn and Google.
Musical Warfare
Google's new music service is in part an answer to Baidu's success , which is driven in part by its music search service. Some 7 percent of its traffic comes from users who use the site to easily access free music. The payoff for Baidu comes from ad sales on its music pages.
However, Baidu's music search service has brought the company to the notice of the international recording industry because its search results also allegedly include unlicensed and unauthorized downloads. On Monday, music labels filed lawsuits against Baidu and Sohu, another China-based search engine. Universal, Gold Label Entertainment, Sony BMG and Warner Music allege that the two Internet companies aid illicit online copying.
While China has one of the largest potential markets for purchasing music online -- it has as many broadband connections as the U.S. -- more than 99 percent of music downloads distributed in China are pirated, according to the International Federation of the Phonographic Industry (IFPI). Legitimate MP3 downloads account for less than 1 percent of global music sales, for a market total of US$76 million in China.
The suits come in the wake of a December ruling that confirmed Yahoo (Nasdaq: YHOO) China's method of delivering music is illegal under Chinese law. Now, the music labels are asking the Beijing Higher People's Court to order Baidu and Sohu to remove all so-called deep links on its music delivery service to copyright infringing tracks belonging to the recording companies.
It is difficult, however, to know how much of the impetus for Google's music service is due to competition with Baidu, said Mike McGuire, a Gartner (NYSE: IT) analyst.
"It's hard to say how much of it is a competitive thing against Baidu in terms of just trying to get into the same spot. Baidu does particularly well in terms of where it is now. So clearly it is an attempt by Google to try and get in on some of that market," he explained.
The difference is that Google will be paying the music labels for the music it provides to its Chinese users, McGuire pointed out.
Build It and They Will Come
Looking at the larger picture, Google has chosen to launch its music service in China to "test the waters," said Susan Kevorkian, an analyst at IDC.
"We believe that Google is testing the waters of the online music service market and that this may be the first of other paid online music initiatives to come from the company over the course of the year," she told the E-Commerce Times.
"The company's timing is good -- the major music labels are collectively supporting legitimate sales of DRM-free, MP3-encoded music, which means that Google and other online music service providers can offer music that's compatible with the installed base of iPods, as well as other MP3-enabled devices," Kevorkian continued.
For Google, this is also an attempt to legitimize the Chinese market and find a way to monetize the traffic, according to McGuire.
"It's similar to what iTunes and Rhapsody and all those legitimate services were doing initially and are still trying to do, which is to present a legitimate alternative to the unlicensed content and P2P (peer-to-peer) networks," he told the E-Commerce Times.
Legitimate download services are arguably better than unlicensed music file sharing, McGuire noted.
"It's easier to find stuff. It's essentially what the pillars are -- ease-of-use, convenience, reliability and consistency are how people try to fight piracy and the illegal P2P content out there. In its own way, besides trying to compete with Baidu, Google is saying 'Let's provide an alternative.' And they're willing to pay for the content."
Google will use some form of watermarking to track the downloaded files, according to the Journal report. That will allow them to do things like advertising, McGuire said.
"In a sense, Google is saying it is willing to put some money into this to create an alternative. One of the challenges [for Google] will be how do you filter out search results for illegal or unlicensed material," he stated.
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