When Baidu first announced plans to go public, we pointed out that people were saying the reason Baidu had been so successful was that it let people download unauthorized music and movies and that by going public in the US, they were most likely going to face legal trouble from the entertainment industry. The only way to avoid that would be to stop offering such downloads -- thereby wiping out its one real competitive advantage over other search engines in China. This became even clearer when two Chinese entertainment companies sued Baidu for copyright infringement. All of this was out there well before the IPO, but did investors listen? Nope. They pushed the stock up to completely unsustainable levels. The stock dropped a bit this week when some Wall Street analysts pointed out there was no reason why the stock should be so high (ok, so we've found the one difference these days from the bubble years -- analysts admit stocks can be overvalued). However, now it turns out that all the big US entertainment companies are piling on a huge lawsuit against Baidu. So, the company now has two choices: fight the lawsuit (which means spending lots of money) or get rid of the downloads and take away their competitive advantage. This was pretty predictable for anyone who actually took a couple seconds to look it up before the company went public. No wonder Baidu's VCs are so pissed off they're still stuck in the lockup period.
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