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 How Start-Up R2G Battles Music Pirates

10 Nov 2006 — WSJ

BEIJING -- Internet-based copying of songs has helped cripple the music industry in China . Now, one pioneering local start-up is using technology to build a business that aims to make music pirates pay.

Privately owned R2G, by taking song thieves to court and deploying technical savvy, is seeking to prove there is money to be made in a market many in the music industry had all but written off. R2G represents record companies like Vivendi SA's Universal Music Group and Bertelsmann AG's BMG Music Publishing, using custom built software called Spider to detect and document illegal listings online of songs owned by their clients.

The Beijing company then negotiates with the Web sites -- filing lawsuits if necessary -- to work out legitimate royalty payments for future downloads on those sites. R2G takes a cut of the payments.

The company was started in 2003 by Jun Wu, a prominent Chinese technology entrepreneur, and Scarlett Li, a former executive at Star TV, News Corp .'s Asian satellite network. R2G stands for "red to green." The company says red represents piracy, which means an industry can't move ahead, and green represents things moving smoothly.

R2G doesn't disclose its revenue or financial results. It says it has contracts with more than 50 music labels and publishing houses, and has licensed song use to more than 100 service providers.

The firm's initial focus has been on songs downloaded to mobile phones and used as ring tones and "ring-back" tones that callers hear when waiting for a phone's owner to answer. Mobile music, which began about five years ago as a side business for music labels, has become a significant source of revenue in China -- which, with some 430 million cellular subscribers, is the world's largest wireless market. BDA China Ltd., a Beijing telecom-consulting firm, estimates that ring-back products alone generated about $430 million in revenue in China last year.

In the past, little of that money was making its way to the artists and record companies that own the rights to the music. When R2G started, Ms. Li estimates, about 90% of service providers selling ring tones were engaging in some form of piracy. Record companies, which have tended to see the China market as a lost cause, had too few employees in the country to monitor violations and try to protect their rights.

R2G has put the online companies on notice that piracy can be costly. Since last year, R2G has won a string of lawsuits against Internet companies that provide music for ring tones. Chinese courts have ordered six domestic companies to pay R2G fines ranging from about $6,000 to $11,000 for selling unauthorized ring tones on their Web sites. The amounts, while relatively small, can sting for such companies, which tend to be tiny. Aside from the cost, R2G and its clients say the suits sound the alarm for other violators.

"You've got to show that you are serious before [the online companies selling songs] are willing to come to the table and talk to you," says Steven Fock, regional general manager for Asia Pacific at Warner Music Group Corp.'s Warner/Chappell Music Inc., another R2G client. "That's the frustration that we are facing now, and that's main reason why we are working with R2G."

Lax protection for intellectual-property rights in China has been a problem for businesses, with counterfeit sales of software, movies, music, clothing and other goods reaching billions of dollars each year, according to U.S. industry associations. The problem is one of the biggest sources of tension between China and its big trading partners like the U.S. and the European Union.

China has laws on the books that protect copyrights and other intellectual property, and the government has stepped up raids of shops carrying pirated goods. But overall, foreign executives say, the laws are still inadequate and enforcement can be inconsistent.

Ms. Li says R2G's goal is to change the culture of the music industry in China . She brings to that monumental task a total lack of sympathy toward those who break the rules. "They need to pay for what they pirated," she says. The lawsuits R2G has filed, it says, are meant to set precedents for chasing other companies that won't pay for using songs that R2G controls for its clients in China .

In 2000, when Ms. Li and Mr. Wu met, online music distribution was still relatively new. Mr. Wu had already built three Internet start-ups, including Nasdaq-listed Linktone Ltd., which provides content for wireless operators in China , and another company that helped big carriers handle billing for mobile-phone text messages. Since 1997, Ms. Li had run Star TV's Channel "V", where she organized the music channel's first Chinese music awards and handled government relations for the company.

The two cast about for a way to make money in music. "In China , you just don't get much revenue selling CDs. It's all piracy," Ms. Li says. "So we thought: How do we enter the digital-media business?"

They settled on ring tones, an area where consumers were already spending significant sums. In addition to representing record labels, R2G also works with Chinese service providers to ensure they have access to properly licensed content.

One of R2G's first big successes came last year, when it lobbied Baidu.com Inc., a search engine that is China's most visited Web site, into deleting thousands of links to Internet sites that offered pirated pop songs. And afterward, Baidu agreed to make R2G its only ring-tone distributor, to guarantee that all of the search company's mobile music content offerings are legal.

R2G, which has 90 employees, owns exclusive rights to tens of thousands of songs in China , including those by Chinese-language pop superstar Jay Chou. The company purchases the Chinese publishing rights of titles agreed upon with the labels, then collects a share of the royalties paid by mobile music providers who use the melody or lyrics of those titles.

Still, R2G faces big challenges. Violators remain obstinate, and some are fighting the court orders against them. Cao Ming, chief executive of 9Sky.com, a digital music Web site based in Shanghai , says his company is fighting a court order to pay 89,000 yuan ($11,311) for 11 titles licensed by R2G from Universal Music. Mr. Cao maintains that R2G has asked for too big a slice of the revenue from the song downloads. His company and R2G are "on the same side" of the piracy issue, he says, "but we have different understandings."

"It's a very tough business," Ms. Li says. Financially, she notes, "there's a lot of risk associated with the piracy issue."

Ms. Li says her company's efforts are bearing fruit, at least in the mobile music business. According to R2G's estimates, the number of companies stealing its clients' songs is about 40% smaller than it used to be.


                                         --Kersten Zhang contributed to this article

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