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Internet giant Tencent Holdings controls China’s biggest music-streaming services operator, Tencent Music and Entertainment Group. Photo: Reuters

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
Small operators of music-streaming apps in China will soon be able to offer some of the most popular tracks that were controlled for a long time by Tencent Holdings, but analysts said these firms still face an uphill battle to challenge the internet giant in this market.
On Saturday, China’s antitrust watchdog the State Administration for Market Regulation (SAMR) slapped Tencent with a 500,000 yuan (US$77,117) fine and ordered the company to end its exclusive music licensing deals with global record labels within 30 days. Tencent, however, will be able to retain its exclusive deals with independent artists, which should last no longer than three years, as well as its partnerships on new releases.

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.

Shenzhen-based Tencent, which runs the world’s largest video gaming business by revenue and China’s top social media platform WeChat, also controls the country’s biggest music-streaming operation. New York-listed Tencent Music Entertainment Group (TME), in which Spotify is a shareholder, operates popular apps QQ Music, Kugou Music and Kuwo Music. These three apps had a combined 622 million monthly active users (MAUs) in the December quarter last year.
New York-listed Tencent Music Entertainment Group operates popular streaming apps QQ Music, Kugou Music and Kuwo Music. Photo: Shutterstock

“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’s music-streaming apps have led the domestic market on the back of its extensive music library, comprising about 66 million tracks by the end of 2020, built under exclusive partnerships with the world’s most prolific music labels. That outsize market presence enabled TME to scoop the rights to stream music from Jay Chou, one of the biggest Mandopop stars.

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.

China orders Tencent to end exclusive music deals

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.

TME’s closest rival in China is NetEase Cloud Music, which had 181 million MAUs and a library with 60 million tracks as of December last year, according to the prospectus of app operator Cloud Village, which Hangzhou-based parent NetEase plans to spin off for an initial public offering in Hong Kong.

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.

Kugou Music is popular among older users in northern China, while Kuwo Music is favoured in southern China by users of all ages, according to iiMedia. It said QQ Music has an overall young user base.

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.

Xiami Music, the pioneering Chinese music-streaming service owned by Alibaba Group Holding, closed in February this year. Alibaba owns the South China Morning Post.

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.

Demise of beloved music app shows how China’s internet has changed

Tencent, meanwhile, invested aggressively to build up its music library and streaming operations.

In 2016, Tencent bought a majority stake in China Music Corp, which operated Kugou and Kuwo, in a deal valued at US$2.7 billion. Tencent proceeded to merge its QQ Music business with those two apps to form music-streaming giant TME, which went public in the US in 2018.

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.

China’s music-streaming market faces change amid increased antitrust scrutiny

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.

The NCA’s intervention led to an agreement in 2018 between the operators to share up to 99 per cent of their music content, but experts said the remaining 1 per cent was what mattered most because it covered the most popular artists.

“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.

This article appeared in the South China Morning Post print edition as: Tencent ‘likely to maintain’ music-streaming lead