Analysis | Why the end of Tencent’s exclusive music deals not the panacea for China’s smaller music-streaming apps
- China’s State Administration for Market Regulation has ordered Tencent to end its exclusive music licensing deals with global record labels
- New York-listed unit Tencent Music and Entertainment Group operates popular apps QQ Music, Kugou Music and Kuwo Music
While the end of exclusive licences is considered a boon for the entire music-streaming market in China, analysts do not expect a shake-up in the sector because Tencent’s apps have already built a significant lead through the years.
“The music copyright should have been opened to other players much earlier,” said Li Qingshan, vice-director for consumer research at EqualOcean, an investment research firm focused on China. “Tencent has already built up a large base of loyal users and an ecosystem that encompasses more than music streaming.”
TME, which also runs karaoke app We Sing, generates around two-thirds of its sales from social entertainment-related businesses such as online tipping from live streams.
“Aside from high switching costs in music streaming, TME is also backed by the breadth and strength of Tencent’s social networking reach to power its experiences business, which is difficult to replicate, and represents a substantial part of TME’s revenue,” said Matthew Kanterman, an analyst at Bloomberg Intelligence.
Chinese music app users typically switch between several different platforms, as content from many popular music artists cannot be streamed from a single source. As such, the partial end of exclusive music-streaming copyright deals is not expected to result in a large-scale migration of users to TME’s rivals, according to analysts.
TME’s apps and rival NetEase Cloud Music, for example, each cater to very different user groups, said Zhang Yi, chief executive at Shenzhen-based iiMedia Research.
NetEase Cloud Music users – consisting of well-educated urbanites, according to iiMedia – are known for being a close-knit interactive community. It is common for tens of thousands of these users to gather online under a song’s comment section to share their stories and feelings about the tune.
“TME’s users don’t necessarily fit into the NetEase Cloud Music community, so it’s unlikely to bring a substantial boost to NetEase’s market share when the licences are open,” iiMedia’s Zhang said.
Beijing dropped the hammer on unauthorised dissemination of copyrighted songs in 2015, when pirated tunes were rampant across all domestic online music platforms. Piracy had cost China’s music industry about 1 billion yuan in lost revenue each year, according to iiMedia.
That crackdown prompted far-reaching changes in the local market. Major music-streaming app operators scrambled to acquire exclusive music rights to keep existing users and attract new consumers to their platforms. Those who failed to secure exclusive deals eventually shut down.
During the 2015 crackdown, Xiami saw 2.2 million tracks taken down, but was slow to pursue deals for copyrighted music. It went from one of the top streaming platforms a few years ago to a distant laggard, with MAUs falling to 22.4 million by October last year.
“Copyright resources are imperative for all types of music platforms, as there is hardly any barrier or differentiation for the core functionality of these services,” iiMedia’s Zhang said.
Tencent, meanwhile, invested aggressively to build up its music library and streaming operations.
Universal Music, Sony Music Entertainment and Warner Music Group have all sold exclusive rights to their catalogues to TME, which has sublicensed that content to other music-streaming platforms. The SAMR said TME controlled 80 per cent of the music tracks streamed in the domestic market after the 2016 acquisition.
In 2017, China’s National Copyright Administration (NCA) summoned music-streaming services operators, including Tencent, Alibaba and NetEase, to a meeting to convince them to work together and stop their fight over exclusive licensing deals.
Competitors like NetEase Cloud Music had been complaining about paying “two to three times the reasonable cost” for content under TME’s sublicensing arrangement, NetEase chief executive William Ding Lei said in an earnings conference call last year.
“Theoretically, if you can control the top 1,000 [music tracks], you can secure at least 95 per cent of [music-streaming] users,” iiMedia’s Zhang said.