Piracy threatens China Internet development - Sohu CEO

* Sohu says piracy a threat to industry innovation

* Establishes alliance to fight Web-based piracy

By Melanie Lee

BEIJING, Nov 2 (Reuters) - Piracy, long a problem for foreign media companies in China, also stands to stifle innovation by the country's own dynamic Internet industry, the chief executive of one of China's oldest Web companies said on Monday. "China needs to clean up piracy on the Internet or face a lag in innovation," Charles Zhang, chief executive of Sohu.com (SOHU.O), said at one of China's biggest Internet conferences taking place this week in Beijing.

"The Internet in China has reached an intense and more developed stage," he said. "Protecting intellectual property is becoming even more important ... Solving piracy on the Internet will help the piracy situation in China."

Zhang is one of a small but increasingly vocal group of figures in China's fragmented media community calling for officials to address a problem previously considered a major thorn for foreign players trying to crack the China market.

In September, Sohu was one of several companies that led the formation of an alliance with 110 Internet video copyright owners set on tackling Internet piracy in China.

Copyright controversies have pulled in not only China's small Internet companies, but also major players like search leader Baidu (BIDU.O), which was at one point sued by major record companies for allowing illegal sharing of copyrighted music over its site.

More recently, a group representing Chinese authors has accused Google (GOOG.O)of violating copyrights with its digital library, a claim that Google denies by saying the service complies with international law. [ID:nSHA270747]

Zhang also blamed piracy for hindering development of a vibrant movie industry in China, where illegal CDs are usually available within days of a movie's theatrical release for the equivalent of less than $2.

"If we don't solve the problem of piracy, no one will buy movies or watch TV shows," Zhang said. "Everyone will watch it on the Internet, and this will pull down the innovation streak in China."

China is one of the world's fastest-growing film markets, but it has also been one of the toughest for foreign film makers because of piracy and strict limits on the number of films they can export to China each year.

Industry estimates are relatively few, but most put losses from movie piracy in China in billions of dollars each year. (Writing by Doug Young; Editing by Chris Lewis)