How Tencent is ruling China’s fledgling music market

Over the past few years, almost all conversations about China’s music market have been dominated by just one company, Tencent Music Entertainment Group (TME), which is estimated to have a whopping 76% market share. With 600 million monthly active users, the music streaming service dwarves Spotify with its 140 million MAUs.

Most of those users are listening to free ad-supported services, but TME has managed to carve out 15 million paying subscribers, around 10 million on its QQ Music platform and the rest on KuGou and Kuwo, which it acquired when it bought out China Music Corp last year. Although that’s encouraging, there’s still a lot of conversion work for TME to do – in comparison Spotify now has 60 million paying subscribers while Apple Music had 27 million as of June.

Meanwhile, Tencent’s domestic competitors are minnows in comparison. NetEase Cloud Music is the second biggest player with a 16% market share, followed by Baidu Taihe Music with 4% and the remaining 4% split between Alibaba Music Group and others. Building on its first mover advantage, Tencent has also grown by leveraging all the other online platforms it owns – including games portal QQ Games, social networking site QZone, Tencent Video and of course its WeChat messaging and ‘everything but the kitchen sink’ app, which at last count had 963 million MAUs.

Using this considerable fire power, its perhaps not surprising that Tencent has managed to sign exclusive licensing deals with all three of the major Western record companies – Sony Music, Warner Music and Universal Music Group (UMG). It also holds streaming rights for Taiwan’s JVR Music, founded by leading artist Jay Chou (pictured), and Korea’s YG Entertainment.

UMG was a holdout until May 2017 when the Western label finally signed what it described as a “landmark licensing agreement that will significantly expand the Chinese music market”. As with Tencent’s other deals, the agreement gives the company rights to sub-license UMG’s catalogue across all the other streaming platforms in China.

At the time the deal was signed, UMG chairman and CEO Lucian Grainge said: “Given recent developments in technology and the commercial environment there, now is the right time for an innovative strategic partnership with a leading Chinese company like Tencent that can meaningfully accelerate the development of the country’s entire music ecosystem.”

In other words, signing an exclusive deal with Tencent is good for China’s music industry overall as only this company has the ability to create a real market from what was previously just a hot mess of piracy and zero revenue.

FORCED TO SHARE

But the Chinese authorities don’t appear to share that view. In mid-September, the State Administration of Press, Publications, Radio, Film and Television (SAPPRFT) warned all Chinese music streamers and 20 domestic and international record labels that the practice of signing exclusive licensing deals has to stop. SAPPRFT described the practice as “not conducive to the wider dissemination of musical works or to the healthy development of the industry”.

Indeed, artist managers had already raised concerns about the fact that most artists were only available on one service – for example you could only find Jay Chou on Tencent’s platforms. And Tencent wasn’t the only music streamer signing exclusive deals – Alibaba signed one in 2015 with Bertelsmann Music Group (BMG).

Around the same time as SAPPRFT’S pronouncement, Tencent and Alibaba surprised absolutely no-one by saying that they’d reached a deal to start sharing their music – Ali would get to stream the music that Tencent had licensed, while Tencent would have access to Ali’s licensing agreements, which also include Hong Kong’s Media Asia and Taiwan’s Rock Records and HIM International Music.

MATURING MARKET

While Tencent probably didn’t have much choice in signing this deal – it does demonstrate how the Chinese music market is starting to mature. Just two years ago, most of the Chinese streamers were suing the hell out of each other, all part and parcel of the transition away from piracy, and Tencent blocked Ali’s Xiami Music service on WeChat resulting in an ugly spat. The recent rapprochement is also well timed as TME is currently raising new funding ahead of a planned $10bn IPO.

And to be fair, Tencent has played a significant role in creating a legitimate market in a territory that until a few years ago was written off by Western labels due to rampant piracy. After signing its exclusive deals, the Chinese giant invested in anti-piracy legal firepower and urged artists to encourage their fanbases away from piracy sites. Partly due to these initiatives, China’s music market grew by 20.3% in 2016, according to global industry body IFPI, compared to a world average of 6%.

Meanwhile, it’s not just China’s music industry that is starting to grow – the country’s two largest streaming video sites, Tencent Video and iQiyi, now boast more than 63 million paying subscribers. The difference is that the video sector already has three big players – Tencent, Baidu-owned iQiyi and Alibaba’s Youku – along with several smaller services, while the music industry is still concentrated on one behemoth. And while the Tencent-Alibaba tie-up is a step in the right direction, it won’t be much comfort to NetEase, which Tencent recently sued for copyright infringement.

NEXT STEP THE WORLD

The big question now for Tencent is whether it uses its market leading position in China to take on the rest of the world. So far its licensing deals with Western labels only cover China, but the Chinese government would presumably be supportive of efforts to take Chinese artists to the global market. A story also emerged in the tech press in September that Tencent had tried to acquire Spotify earlier this year. While neither party confirmed the news, it does suggest that the Chinese giant has international ambitions, although they may not be easy to realise.

Tencent already operates a music streaming service JOOX in Hong Kong, Thailand, Malaysia and Indonesia. In June 2017, the service expanded to South Africa through a deal with Tencent shareholder Naspers. But Tencent and its music streaming brands are still relatively unknown in the rest of the world.

Another difficulty – also faced by WeChat, Tencent Video et al – is that most international markets are already swamped by other services and apps. In South Africa, JOOX competes with Google, Apple, Deezer and Simfy. In Southeast Asia it competes with Spotify and PCCW’s MOOV. In a recent interview with Bloomberg, Tencent Holdings senior executive vice president SY Lau said: “Going overseas is essentially the challenge of every Chinese company. We tried to make WeChat international. The reality was that there were other products in the market already.”

There are also concerns about how closely Chinese companies like Tencent have to cooperate with Chinese censorship authorities and questions around how much global expansion would be reciprocated. Foreign music streaming services are not blocked per se in China, but neither are they given an easy ride. Spotify still hasn’t launched in China and Apple Music hasn’t made much headway despite launching here in 2015. The issues they face include complying with censorship requirements, lack of local repertoire and finding a user interface that resonates with Chinese music fans.

But eventually Tencent may have no choice but to make a big international push – it’s a listed company and so locked into an inevitable quest for growth. The China market may be huge but is reaching saturation in terms of smartphone usage. If TME does step outside, the challenge will be rubbing up against Western tech giants in an industry where streaming revenue is growing but so far nobody is making any actual money. Acquiring a big existing player like Spotify may be the only way to go.