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An important step in China's ongoing battle against piracy is showing signs of being undermined, with word that a Shenzhen company that received a record fine for copyright violations was attempting to avoid the penalty through use of an old trick.

The Shenzhen government should take extra efforts to enforce the penalty, and also make sure that the company, QVOD, permanently ends its piracy practices. Such a tack would send a strong message to Chinese companies that intellectual property theft of any kind won't be tolerated, and the government will tirelessly pursue culprits until they are brought to justice.

The case involving QVOD first jumped into the headlines in May, when media reported the Shenzhen government was preparing to fine the company an unprecedented 260 million yuan ($43 million) for copyright violations. (previous post) QVOD owns a popular video player, and also operates a video streaming site. The Shenzhen government said the amount of the fine was equal to money that QVOD earned through the illegal transmission of pirated material over its site.

The case was back in the headlines late last month when Shenzhen formally levied the fine and gave QVOD 15 days to pay, adding that failure to do so would result in a 3 percent penalty for each day past the deadline. QVOD refused to pay, and said it would appeal the fine through an administrative procedure. Around the same time, other reports said that locally-based Internet giant Tencent (HKEx: 700) (OTCPK:TCEHY), which also operates a video sharing service, was the major force that lobbied the Shenzhen government into taking its unusually tough action.

Now in the latest twist to the saga, media reports said late last week that QVOD recently vacated its longtime headquarters and relocated staff to one or more other locations. (Chinese article) The reports added that QVOD's managers have also registered several new companies, including one that is housing much of the equipment used to provide the company's video sharing service.

Earlier reports had said QVOD was clearing its site of pirated material, and it's unclear if the company plans to try and follow in the path of other major Chinese firms like Baidu that were pursued for piracy in the past and later moved to clean up their sites. But regardless of what QVOD does in the future, the company's blatant recent disregard for copyright laws is what lies at the heart of the record fine and it should pay the consequences for its actions.

Tencent's role in the matter marks a major shift in China's fight against piracy, which has lasted for more than a decade. In the past, guilty companies often received nominal punishment for their crimes, partly due to lack of determination from officials reluctant to harshly punish firms that contributed to their local economies. As a result, offenders would often do what QVOD is now attempting, by closing up shop under one name, then re-registering under another and beginning operations anew.

But the rise of multibillion-dollar companies like Tencent, Baidu (Nasdaq: BIDU) and Youku Tudou (NYSE: YOKU) has changed the equation by adding a new generation of much larger private sector players to the picture. These big new companies are spending millions of dollars to legally purchase copyrighted films, TV shows and music for their own services, and are keen to make sure that others don't illegally use those materials.

This new style of private sector enforcement splashed into the headlines last year when a group of major video site operators including Tencent and Youku Tudou joined with Hollywood's biggest trade group to sue Baidu for copyright infringement. More recently, Shenzhen-based online video firm LeTV (Shenzhen: 300104) successfully sued to block the transmission of more than 10 of its shows over an Internet TV product developed by fast-rising smartphone maker Xiaomi.

The Shenzhen government should make a strong example of QVOD by aggressively pursuing the company and its managers until it pays the 260 million fine, and block them from opening any new businesses until it does. Other government bodies, working with a new generation of private sector giants like Tencent and Youku Tudou, could follow with similar actions throughout China. Such a coordinated national campaign would send an important signal to copyright violators that there's no place to hide, and the only way forward is to abide by international norms for the respect of intellectual property.

Bottom line: The Shenzhen government should aggressively pursue QVOD to make sure it pays a record 260 million yuan fine for piracy.

Disclosure: None.

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Source: QVOD Tries Tested Tactic To Evade Piracy Fine