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China Regulator Orders Tencent Music to End Exclusive Licensing Deals With Labels

Tencent Shenzhen Headquarters
Chen Xiaotie/VCG via Getty Images

Exterior of Tencent Shenzhen Headquarters in Shenzhen, Guangdong Province of China.

But long-awaited order does not mention exclusive artist deals with pop stars like Jay Chou, nor require divestitures.

BEIJING — China’s antitrust regulator has ordered Tencent Music Entertainment to end its practice of making exclusive licensing deals with major record labels, a decision that is likely to further chip away at the dominance of the Chinese music streaming player.

China’s State Administration for Market Regulation (SAMR) said Shenzhen-based TME must forgo its music copyright fees, including high advance payments to copyright owners, by the regulator’s 30-day deadline of late August.

Going forward, the company must also seek approval before requiring copyright owners to offer it preferential licensing terms over its competitors "without justifiable reasons," while also refraining from other measures that could help TME reassert its dominant market status, the regulator said.

Tencent Music, in a regulatory filing on Monday with the U.S. Securities and Exchange Commission, said it is “committed to complying with all requirements set forth in the [SAMR] decision fully and in a timely manner.” The company said it will implement a “rectification plan” that includes terminating exclusive music copyright licensing arrangements within 30 days of the decision, which was handed down on Saturday (July 24).

Shares of TME fell nearly 5% on Tuesday to $9.96 a share. Amid China's regulatory crackdown, the stock has fallen nearly 69% since hitting a high of $31.79 on March 23. (Since Tencent Music went public on the New York Stock Exchange in 2018, its market cap has fallen from $21 billion to under $17 billion.)

The long-rumored action by the SAMR makes official that the Chinese government will not allow Tencent Music to grow unchecked and at the expense of its competitors. And it opens the door for rivals like NetEase Cloud Music to make further inroads in China’s streaming market.

“An opportunity has indeed arisen for China's online music market to beat the former market dominant TME,” You Yunting, an intellectual property rights attorney at Debund Law Offices in Shanghai, tells Billboard.

NetEase Cloud Music, which in May applied to go public on the Stock Exchange of Hong Kong, said it “firmly supports SAMR’s penalty" on Tencent, according to a statement posted on Saturday on the company's Weibo account. NetEase added that it "promises to actively fulfill its platform responsibilities" including not signing exclusive online music copyright agreements and to "resist driving up copyright prices."

The action was the latest of the antitrust watchdog’s wide-ranging penalties throughout the country’s tech sector in recent months, including the July 7 fining of Tencent Holdings and other tech titans Alibaba, Didi, Suning and Meituan, for failing to report their prior merger arrangements for anti-monopoly assessment. The SAMR, in its order, said Tencent was the first case in which the Chinese regulator took steps to restore market competition since the government implemented its anti-monopoly law in 2008.

The regulator’s decision stemmed from parent company Tencent Holdings Inc.’s acquisition in 2016 of China Music Corporation, from which the newly-renamed Tencent Music Entertainment added the popular Kugou and Kuwo music streamers. Those platforms, along with QQ Music, have allowed Tencent to control 77% of China’s monthly active users among the country’s top five streaming apps, according to a December assessment by QuestMobile, a Chinese research company.

Tencent grew faster through exclusive deals with the majors for use of their international catalogs on TME’s streaming platforms -- deals for which competitors say the company routinely overpaid. (Andy Ng, a TME group vp, has told Billboard that the prices were in line with projections of streaming users.)

In its investigation, the SAMR found that after acquiring China Music Corporation, Tencent was "illegally dominating the market" by owning more than 80% of the "exclusive music library resources," through which "it gained the ability to pressure upstream copyright parties to reach more exclusive copyright agreements with them, or require them to offer better trading conditions than their competitors."

Tencent has also capitalized on listeners who do not use its services, sub-licensing its exclusive distribution deals to its competitors for two to three times what it pays, NetEase CEO William Ding claimed publicly last year.

Ahead of the regulator’s decision, Tencent Music was already moving away from its practice of pushing for exclusive deals, in part because of pressure from the majors. In the past two years, Universal Music Group, Sony Music and Warner Music Group have decided to diversify their distribution and leverage intensifying competition for better deals offered by NetEase Cloud Music and others.

A large percentage of music has already been available on all Chinese streaming services, with the key holdouts being high-profile Chinese artists and independent labels, says Kyle Bagley, CEO of the Shanghai-based music marketing company Groove Dynasty. “As the music available on all services begins to level out, we'll hopefully see the platforms working to improve their product in other ways to attract or retain users,” he says.

Despite the order on exclusive catalog deals, the regulator’s action was less severe than it could have been. The SAMR made no mention of Tencent Music’s new release partnerships or exclusive deals with artists like Mandopop star Jay Chou -- for whose songs NetEase paid TME nearly $3 million to sub-license in 2018, according to court filings in China.

And for now, at least, Tencent has avoided dreaded forced divestitures of any of its steaming platforms. Kugou and Kuwo boast the first and third most monthly active users (MAUs) in China, with more than 245 million and 169 million, respectively, according to QuestMobile. TME’s own QQ Music platform ranks second at over 194 million MAUs. NetEase Cloud Music is fourth with 151 million.

China’s recorded-music business has grown at an unparalleled pace over the past five years. It shot up 278% from $209.4 million in 2016 to $791.9 million in 2020, according to IFPI, with streaming accounting for 90.5% of last year’s revenue.

Additional reporting by Hsiuwen Liu 

UPDATE (4:30 p.m. EST on July 27): This story was updated to reflect an updated TME share price and fuller explanation of the SAMR order.