April 25, 2011 / 9:24 AM / 8 years ago

UPDATE 2-China to punish Baidu for illegal music search service

* Baidu vows quick action to resolve matter

* Potential impact on stock depends on punishment

* U.S. says deep links create “notorious market” for downloads

* Baidu to launch licenced music search in May

* Baidu shares jump 54 percent this yr vs 6.3 percent rise in Nasdaq (Adds analyst’s quotes, Baidu comment)

By Melanie Lee

SHANGHAI, April 25 (Reuters) - China’s Ministry of Culture will punish Baidu Inc for providing illegal music downloads, a move that poses near-term risk to the firm’s soaring stock price.

Xinhua, China’s official news agency, reported on Monday that the government will punish 14 websites that have provided illegal music downloads, including Baidu, China’s top search engine.

Xinhua reported that an official said the websites continued to provide that illegal downloads despite repeated warnings not to. Details regarding the punishment were not released.

“We are aware that songs require approval and have sought to comply with previous notifications from the Ministry of Culture. But search engine indexing is a continuous process and some files may have reappeared in results,” said Kaiser Kuo, a Baidu spokesman, in an emailed statement to Reuters.

“Baidu will now take quick action to remove links to any files that have been identified by the ministry,” Kuo said.

Analysts said the move by China’s Ministry of Culture may rattle Baidu’s share price in the near term as uncertainty over the extent of the punishment lingers.

“There have always been legal issues with Baidu music,” said Dick Wei, a Hong Kong-based analyst with JPMorgan, adding that the impact on Baidu would be clearer once the exact punishment was known.

In January last year, a Beijing court cleared Baidu of copyright infringement and said the search engine did not break any laws.

“This will have an impact on their stock price. I think investors in the United States will react on this,” said Fiona Zhou, an analyst with Shanghai-based consulting firm Pacific Epoch.

The legal risks to Baidu’s various businesses have always been its Achilles heel. In 2008, China’s CCTV reported that Baidu accepted money from shady medical practices. The report led to broker downgrades and a plunge in the firm’s stock price.

Baidu shares have risen 54 percent this year, outpacing the 6.3 percent rise in the Nasdaq .

Over the past few months, Baidu has been involved in a dispute with a group of authors over its Baidu Library product. The authors say Baidu reproduced their works without permission.

Baidu subsequently apologised to the authors and took down the infringing material. The firm also said it would launch a licensed music search service in May. [ID:nL3E7F61B5]

Earlier in the month, Baidu reached an agreement with the Music Copyright Society of China (MCSC) to pay fees to the MCSC for every song downloaded using Baidu Ting. The licensed music service would be supported by advertising.

Baidu’s Mp3 music search has been criticised by the United States as being a “notorious market” for piracy over its ability to provide “deep linking” to steer users to allegedly-infringing material hosted on third-party websites. (Reporting by Melanie Lee; Editing by Jacqueline Wong and Matt Driskill)

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