· Baidu Partners with EMI to offer advertising supported music. Baidu has entered into a partnership with EMI Music to launch an advertising-supported online music streaming service in China. Under the agreement, Baidu will set up a special “EMI Music Zone” in its popular music search channel. EMI Music is the largest music label company in China and the 3rd largest globally.
· Revenue sharing agreement. Baidu users can legally stream all of EMI Music’s Chinese songs, while being exposed to advertising. Baidu and EMI Music will share the advertising revenues.
· Advertisers already on board. According to CFO Shawn Wang, China Mobile, the largest wireless carrier in China, has agreed to be one of the advertisers for the “EMI Music Zone.”
· Removes overhang with litigation. We believe this agreement removes an overhang regarding the on-going litigation with EMI. At the same time, this also sets the path for advertising supported partnerships with other record companies.
· Monetizing significant music traffic. This partnership indicates that Baidu has significant leverage over content owners given its sizable traffic (>60% market share in paid search). According to industry stats, entertainment-related searches are highly ranked among the Chinese Internet users. Baidu has positioned itself for the sweet spot, leading the industry in music and downloadable searches.
· Attractive demographic. According to industry stats, Baidu has the youngest user base among all the search engines in China, with more than ~60% of users age 23 and younger. Among the students, Baidu is the favorite search site by far at 48%. We believe the younger demographic (ages 18-25) has strong spending power due to China’s one-child policy, creating a reverse pyramid effect where a youngster is supported by six adults in a family (four grandparents and two parents).
· Music companies have little leverage. Facing serious piracy issues in China, music labels have to compromise to Internet companies, in order to receive revenues from their copyrighted content. We have seen similar deals in the US, with YouTube (now part of Google) cutting advertising-supported deals with Universal, Sony and CBS.
· Banner programs going well. While the financial impact is difficult to assess, we believe this deal should attract additional advertisers for banner and video ads. As a reminder, the company tweaked its ranking system to drive spending of mid to large advertisers. With new channels such as MTV and EMI Zone, in addition to its already popular MP3 and video sites, we believe Baidu’s entertainment portfolio is a very targeted platform for brand advertisers.
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