Tencent Music Entertainment Group is under investigation by China’s competition regulator according to an official posting on Sina Weibo. While the government has not made an official announcement, Weibo postings are often considered de facto declarations of the government’s intentions.
The investigation is reportedly around Tencent Music’s exclusive deals with international majors Universal Music, Sony Music and Warner Music, and whether those deals violate Chinese anti-competition rules.
Tencent signed the deals with all the majors about three years ago but around a year later, the Chinese government forced Tencent to share that content with streaming music service competitors like NetEase Cloud Music. Tencent agreed to sub-license, but reportedly the costs to the sub-licensors are high.
After news broke of the investigation, Tencent Music stock slipped by 6.8% in trading on the New York stock exchange, its steepest drop since March, before rallying.
A senior executive in the music industry in China told Billboard it was likely one of Tencent’s competitors that contacted the government competition watchdog and urged an investigation. The person added that Tencent’s central claim is likely that they are not anti-competition because they are sharing the content of the majors with other Chinese streaming services. But the competitors hold that the cost of the content is so great that they cannot sustain a profitable business. The executive added the issue likely came to a head with Tencent Music’s parent company Tencent Holdings Ltd negotiating to buy a share of Universal Music Group.
The executive stressed the crux of the issue is whether the regulators decide to intensively investigate the situation and its effects throughout the music industry in China. The person noted the watchdog could accept Tencent Music’s explanation of the arrangement being fair competition. However, the executive emphasized if the regulators force Tencent Music to give up its exclusive deals with the international majors it will “hurt Tencent Music’s projected profitability significantly.”
A Beijing-based music producer told Billboard that the situation is informed by Chinese music industry players, and the government competition watchdog, observing the international sphere and determining that certain online platforms (like Google and Facebook) have unfairly dominated the marketplace, whether intentionally or not. The Chinese factions have noted this is not good for the ecosystem, and appear to be determined to avoid a similar situation in China.
A pioneering Shanghai-based music entrepreneur had a different take on the cause of the investigation. The pacesetter suggested that Tencent Music had recently been attempting to dominate the market by signing an exclusive distribution agreement with a distributor Tencent effectively controls. This further move to secure exclusivity in the market caused the watchdog to intervene. Thus, the entrepreneur suggested it was not simply the fact Tencent Music licenses major’s content to competitors at an elevated rate that led to the scrutiny.
An American music executive who has worked extensively in China told Billboard that he thought eliminating unfair competition was a natural next step in the market’s development. The executive suggested that previously the main justification for exclusive deals was they were more effective in fighting piracy. The person added now that the market is legitimizing, and growing quickly, it is shifting to a more equal playing field for all services. The executive added it seemed like an indication that the market is on a healthy path.