China’s competition body probes Tencent Music over licences

Hong Kong/Los Angeles — Tencent Music Entertainment is under investigation by China’s antitrust authority in a review that could end exclusive licensing deals it forged with the world’s biggest record labels, people familiar with the matter said.

The State Administration of Market Regulation launched the probe in January and is scrutinising the Shenzhen-based company’s dealings with music labels including Universal Music Group, Sony Music Entertainment and Warner Music, the people said, asking not to be identified discussing a private matter.

The three largest record labels have all sold exclusive rights to a major chunk of their music catalogues to Tencent Music, which is controlled by social media titan Tencent Holdings but also backed by Sony and Warner. Tencent Music then sub-licenses that content to smaller rivals, an arrangement they complain is unfair. Tencent Music pays fees that are unreasonably high and passes along much of those costs to its competitors, they say. Licensing songs from Tencent Music for use in China can be twice as expensive compared to when licensing directly from major labels for the rest of the world, one person said.

Music and video platforms, including those operated by Alibaba Group Holding, Baidu and ByteDance, all have to sub-license content from Tencent Music. The regulator’s actions pose a threat to Tencent, which leveraged a billion-plus social media users to dominate a Chinese online music industry expected to be worth $30 billion by 2023. Music is now a key driver for the WeChat-operator, which is struggling to sustain growth as US-China trade tensions depress its home economy.

Tencent Music, NetEase, ByteDance, Baidu and Alibaba declined to comment on the probe, which was previously reported by Capitol Forum and MLex without giving details of the pricing concerns of other platforms. The regulator didn’t respond to a fax seeking comment.

Tencent Music, which floated in the US last year, boasts the country’s largest music content offering with more than 20-million tracks from over 200 domestic and international labels, according to the company’s prospectus. For the June quarter, it had over 650-million monthly active users and 31 million paying subscribers across its QQ Music, Kugou and Kuwo apps. Revenue from online music services rose 20% to 1.56-billion yuan ($218m) in the period.

But its gross margin fell to 33% from 40% in the June quarter in part because of waning sub-licensing revenue from competing platforms, CFO Shirley Hu said on a conference call in August.

Long a haven for piracy, China became one of the 10 largest music markets in the world in 2017 and climbed to seventh position in 2018. Major record labels’ sales have ballooned in the country thanks largely to the exclusive deals with Tencent. Music publishers are still hoping more people in the world’s most populous country will opt to pay for music.

Tencent Music isn’t the only company to own exclusive rights. NetEase Music has also acquired exclusive rights to individual artist and record labels and continues to bid on licensing, according to industry figures. Many independent record labels have opted not to sell anyone exclusive rights, and say they have benefited from that arrangement.

As part of the ongoing investigation, regulators solicited input from competing music platforms as well as the record labels involved, according to the people. China’s copyright watchdog in 2017 warned streaming services including Tencent Music against entering exclusive licensing deals. Under such pressure, Tencent Music and distant-second rival NetEase Music agreed to sub-license more than 99% of their music catalogs to each other, in 2018.

The investigation may complicate Tencent’s expansion ambitions. It’s in talks to buy 10% of UMG in a deal that would value the world’s biggest music label at $34bn and help bolster its Asia presence.

Music streaming is one of Tencent’s few business units that has made it big beyond its home market. Tencent Music said its karaoke app WeSing has been topping the download chart in the Philippines’ Google Play in recent months after it was launched in Southeast Asia. Tencent also owns a stake in the world’s leading music streaming service, Spotify, while the Swedish company is invested in Tencent Music.

Bloomberg