State of China's Recorded-Music Industry, As Seen Through One Of Its Quietest Yet Most Powerful Companies
Recorded music in China has undergone an unprecedented amount of globalization and transformation over the past decade -- and one company has been at the forefront of some of the sector’s most defining success stories.
Outdustry, a ten-person music-industry services firm founded by Ed Peto, has quietly built out landmark management, A&R, marketing and distribution services in China for some of the world's biggest music companies.
Since its founding in 2006, Outdustry has worked on marketing campaigns in China for the likes of Warner, Universal, TaP Music and mtheory; built up Beggars China into a more profitable business for the indie label than in Japan; consulted for Spotify, providing a broad look at the Chinese market from an international streamer perspective; landed publishing cuts with Chinese stars like Bibi Zhou, TFBoys, Jike Junyi and Vision Wei through wholly-owned subsidiary Outdustry Songs; sat face-to-face with members of the National People’s Congress of China in closed-door meetings to discuss copyright law reform; and set up administration for Merlin’s non-exclusive licensing deals in China, essentially controlling local distribution for roughly 12 percent of the global digital recorded-music market.
The opportunities in recorded music in China haven’t always been so vast. When Peto first set up his company in Beijing thirteen years ago, China was still a 99 percent piracy market, and all of the biggest local music services (including Tencent Music, NetEase Cloud Music and Ali Music) were unlicensed, having started out essentially as P2P file-sharing platforms.
Overall, China’s official commitment to copyright protection isn’t even three decades old yet: the country passed its first copyright law in 1990, and founded its first and only performing rights organization, the Music Copyright Society of China (MCSC), in 1992.
“As uphill as this may all sound, the simple fact is that China loves music and eventually the rights that underpin it all will get their due,” Peto tells Billboard. “All the signs are there.”
According to the IFPI, China’s recorded-music sector generated $292.3 million in 2017. While a 35.3 percent increase year-over-year, that amounts to roughly 20 cents per person in the country annually, suggesting a significant amount of money being left on the table.
This is in part because free music consumption remains the local norm; for instance, Tencent Music, a public company on the New York Stock Exchange, revealed in its IPO filing that over 96 percent of the company’s 600 million consumers aren’t paying for access to music streaming.
That said, sources anecdotally peg the current piracy rate in China at a much lower rate of 30 percent. In addition, not only are the free tiers on local streaming services more fully licensed, but these companies are also actively policing content infringement, in part thanks to a nationwide anti-piracy crackdown that China’s National Copyright Administration (NCAC) has been fronting since 2015.
The publishing picture looks slightly more precarious. While there are still no official trade numbers available for publishing in China, sources say the size of the market is “sub-$100 million,” with digital accounting for 60 percent of the pie. Peto tells Billboard that local society MCSC is "woefully underpowered" to enforce performance royalty collections, in part because the potentially lucrative channels of radio and TV are still owned and controlled by the state.
Outdustry is also the first and only international indie member of the Chinese Audio-Video Copyright Association (CAVCA), a local karaoke collection society that was originally set up in 2008 as a mirror on other phonographic performance societies like PPL in the U.K. Like MCSC, however, CAVCA is also underpowered in relation to government-owned entities, leaving a reported hundreds of millions of dollars on the table for rights holders.
“The result is total collections of around $30 million per year, with no obvious routes to rapid growth,” says Peto. “When you set this against the wider $300 million streaming market growing in serious double digits every year, it starts to feel like an afterthought. We generally see this space as fascinating, but not lucrative.”
Due to the relatively paltry revenues from recording and publishing, “making it” as a Chinese recording artist has historically emphasized leveraging celebrity by cashing in on public appearances and brand endorsements.
“If you speak to artist-managers starting to do business in China, they’re not going to be as interested in recording and publishing income as they are in the Chanel show they’re doing in Shanghai,” says Peto. “It’s still a tough territory for self-sustaining as an artist if you don’t have access to those types of revenue streams."
Nonetheless, Outdustry and its partners are making the case that recorded music as a viable standalone revenue stream can no longer be overlooked.
A crucial part of this mission involves cultivating and networking with local talent. Early on, Outdustry partnered with U.S.-based company Sterling Sound -- a U.S.-based mastering studio whose roster of engineers has included Greg Calbi, Steve Fallone and the late Tom Coyne -- to build a contact book from scratch of local Chinese producers, engineers and recording studios, ultimately building out Sterling Sound into one of the top mastering companies in the country.
"At the same time China’s figuring out its own commercial models for music, the quality of production keeps getting better," Murat Aktar, president of Sterling Sound, tells Billboard. "It’s becoming better-engineered and better-produced. Reading between the lines, that means there are lots of dedicated people on the ground in China working hard and honing their craft.”
In terms of Chinese talent actually earning their money’s worth on recordings, Peto says that Tencent, NetEase and other tech conglomerates have played an underrated role in giving the market more legitimacy, by pursuing exclusive deals with labels for the sake of market differentiation. Universal, Sony and Warner all currently have exclusive deals with Tencent; competitor NetEase has exclusive deals with labels including Kobalt Music, Armada Music, Cloud 9 Music and South Korea’s CUBE Entertainment.
"A lot is made out of the narrative of 'the Chinese government stopped piracy in China,' as it makes a great headline, but it is more the private commercial interests of these giant tech companies at play here," says Peto. "They switched from being the largest infringers of copyright to the fiercest defenders of those same copyrights, and that’s primarily what changed the market."
But the fact that exclusives have been ingrained into China’s legal music-streaming economy from the beginning has also encouraged some unhealthy business practices, whose residual effects may impact anyone trying to break into the local music sector in 2019.
Historically, exclusive intellectual-property deals in China have been driven by upfront advances, rather than by per-stream payout agreements. Many local streaming companies have come to treat exclusive deals as their only significant differentiating factor, leading to intense bidding wars at the expense of building high-quality royalty reporting processes. In addition, exclusive deals involve a complex web of "sub-licensing" and "copyright transfer" agreements -- the equivalent of Spotify retaining the exclusive right to sub-license major labels’ catalog to Apple Music -- which often exacerbates the problems of lower-quality data and inconsistent reporting for the rights holders involved.
“If your catalog is worth $200,000 but a company pays you $1 million for it, they can call that a ‘recoupable advance,’ but in reality it’s a buyout,” one streaming source tells Billboard. “It’s to buy silence. It’s bad for the market, because it makes artists and labels less motivated to invest more in marketing and promotional campaigns, or to build out more long-term relationships, because they've already filled their revenue KPIs for the next three years.”
Lower-quality data can have especially negative implications for independent artists and labels, which is why Beggars, Merlin and other independent partners enlisted Outdustry to help negotiate and administrate non-exclusive direct deals, forgoing higher upfront advances and profits for better reporting. The success stories one hears about in music rarely involve leaving money on the table -- but in the pursuit of solid infrastructure over shady metrics, one doesn’t have that much of a choice.
“We started with a lot of resistance to doing anything but an exclusive deal, and not just from Tencent,” Charles Caldas, CEO of Merlin, tells Billboard. “Given Merlin’s position that we want our members to be as informed and connected with local platforms as possible, just letting one player dominate the whole market for us wasn’t the path we wanted to take.”
Despite the free tiers of China’s streaming services being more fully licensed, early challenges with piracy are also far from completely solved. For instance, as of June 2018, Tencent Music was facing 931 copyright infringement lawsuits seeking total damages of $7 million, according to the company’s IPO filing. Sources say that tech teams at Tencent and Alibaba had never heard of DDEX even five years ago, and were asking for labels simply to send them cloud-locker links or even physical hard drives of MP3s for digital distribution, instead of digesting and delivering tracks and metadata legally.
“One of the biggest challenges in navigating these platforms is that we have to think not just about delivery and reporting, but also about a long-term takedown procedure,” says Caldas. “We spend a lot of time getting our labels to understand that as they deliver content, part of what needs to happen is a platform-wide sweep to make sure there isn’t any infringing content. It’s not the same as working with a brand-new streaming service that just opened up and has no sort of track record behind it. We’re very much dealing with the past as much as we are building the future.”
From an artist-engagement standpoint, Western labels are also already starting to prefer some services over others. NetEase -- which claims to have over 400 million users, roughly 100 to 150 million of whom are active on a regular basis, sources say -- has the highest rate of international music consumption its platform, as it attracts users mostly from Tier-1 and Tier-2 cities (i.e. Shanghai, Beijing, Shenzhen and Guangzhou). Similar to SoundCloud, users can also comment on any song or video on NetEase, and read other users’ comments as a song is playing.
"Comments are the best front-facing metric of an artist’s resonance in the market," says Peto. "If you were to ask me now to check on the presence of a particular artist in China, the first thing my team would do is look at how many comments are underneath your singles on NetEase."
In contrast, Tencent Music has been able to amass nearly twice as many users as NetEase in part because its streaming services, including QQ Music, Kugo and Kuwo, cater primarily to users in Tier-3 through Tier-5 cities who aren’t as interested in consuming international music.
“Working in China, you get a sense of the sheer scale of the country and its commercial potential, but many of the Tier-3 through Tier-5 cities are far off for international companies,” Simon Wheeler, director of digital at Beggars Group, tells Billboard. “People in Tier 1 cities are going to be a lot more receptive to what we’re doing, whereas in Tier 5 it might mean nothing to them.”
Outdustry has proven to be a valuable resource in helping clients navigate these differences in cultural preferences across the continent, as well as in understanding the power of online fan dynamics -- and avoiding its pitfalls. For example, one manager source says that Chinese users initially thought his company’s official artist accounts were fake because they weren’t posting in Chinese. Wheeler adds that it’s “very easy to upset people” on Chinese social media, which is ridden with jiànpán xiá (键盘侠) -- a term that translates directly to “keyboard man” or “keyboard warrior,” and is analogous to internet trolls.
On the more positive side, fans in China and across Asia are especially proactive in rallying each other's time to help their favorite artists succeed -- whether through crowdsourcing eight-figure ad buys for their favorite boy bands, or through gifting digital downloads to each other to ensure a track makes it to No. 1 on the charts.
Outdustry and Beggars experienced this firsthand when executing on the successful marketing campaign for Adele’s album 25 in China. Not only did 25 receive a blanket front-page splash across all local major streaming platforms and spins across national and regional state radio, but the album was also the first by a major western artist in China to be sold in a download-only, pay-what-you-want album format -- consistent with Adele’s global no-streaming strategy at the time.
“You could technically download the album only once, but there’s an option at checkout to indicate how many copies you want,” says Peto. “People were buying 20 to 30 copies of the album because there were leaderboards showing who bought the most copies, and those same people would then go on socials bragging about how many copies they got.” The strategy has now become standard practice for most high-profile releases in China.
Looking to the future, Outdustry is expanding into other market that are undergoing a similar digital transformation in music. The company launched its first India office in Mumbai on Nov. 1, 2018, which is headed by Roochay Shukla (former assistant promotions manager, international music at Sony Music India) and currently handles local marketing services for AWAL and mtheory.
While India presents a vastly different technological and cultural landscape from that of China, the former's relatively under-monetized recorded-music infrastructure presents similar problems -- and opportunities -- for international rights holders, particularly with respect to global hits.
"We've seen the same pattern when a streaming service launches in a new market: first there’s an immediate coalescing around the global charts, but then a strong regional market emerges and catapults local music to an international stage," Eric Fritschi, evp, marketing and business strategy and head of artist partnerships at mtheory, tells Billboard. "You saw this in Mexico and Latin America: the Mexican streaming chart used to be just the global pop chart, but then came really strong regional playlists around Latin music, which caused songs like ‘Mi Gente’ to explode all over the world. I imagine something similar will happen in both China and India. Traditional Chinese music and Bollywood are likely going to explode globally at any moment."