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Chinese regulator investigating Tencent’s exclusivity deals with the majors

By | Published on Wednesday 28 August 2019


Tencent Music is under investigation by China’s competition regulator over those exclusivity deals it has with the majors, according to a report by Bloomberg.

The exclusivity deals have been an unusual feature of the Chinese digital market for years. Record companies often do a deal with a single digital firm which then not only gets access to that label’s music for its own service (or services in Tencent’s case) but also becomes the exclusive distributor of that catalogue in the Chinese market.

Which means that when new companies enter the streaming market in the country, rather than going around the labels to negotiate licensing deals, for a large slice of the catalogue they must go and negotiate with their competitors. Which, needless to say, has proven tricky.

Tencent was the pioneer of this approach and has exclusivity arrangements with all three majors. The original motivation for the global music firms was that, by getting into bed with one big web company, they could incentivise said company to do what was necessary to kickstart the then still flagging Chinese digital music market. And that strategy basically worked. Of course, the mega-advance cheques Tencent handed over also made this strategy attractive.

Some of Tencent’s rivals – and in particular NetEase Cloud Music – started negotiating their own exclusivity deals with other labels. Partly to give their services an edge from a consumer perspective. And partly to increase their negotiating power when trying to access the catalogues Tencent controlled (basically “you give us X or we won’t give you access to Y”).

The exclusivity deals became more of a problem as the Chinese digital market started to evolve and newer services – particularly the NetEase service – started to gain momentum.

It meant each service had gaps in its catalogue. This meant many users installed multiple music services on their devices. That then arguably makes it harder to persuade users to upgrade to premium, because no one premium service has all the music. And for the record companies in the West, upgrading users to premium has been the priority for some time.

In most other countries, arrangements of this kind would immediately set off competition law alarm bells. Two years ago the Chinese authorities did put pressure on the streaming firms to more proactively license to their competitors the catalogues they distributed in the market. But Tencent competitors complain that licensing music from its rival is more expensive, partly because it is passing on the cost of securing the exclusivity deals in the first place.

According to Bloomberg, China’s markets regulator launched an investigation into Tencent’s exclusivity deals at the start of the year. Investigators have reportedly spoken to Tencent’s digital music rivals, as well as the labels who have struck up exclusivity arrangements. Some sources are suggesting that the outcome of all this could be new regulations that basically end the exclusivity deal system.

Of course, Sony Music and Warner Music might be having second thoughts about renewing their exclusivity deals with Tencent Music anyway, given that the Tencent parent company is in the process of buying 10% of the Universal Music Group. Though that doesn’t mean they wouldn’t consider an advance-heavy exclusivity arrangement with another Chinese web firm.

That said, even some of the beneficiaries of the exclusivity deals have admitted that, while the big Tencent alliance may have made sense when it when it was first negotiated, the Chinese industry would be wise to move on from these kinds of deals in the next few years. And when indie label repping Merlin entered the Chinese market last year it made much of the fact it had negotiated deals with all the key streaming services, avoiding the temptation to take the big advance cheque an exclusivity deal with just one might have offered.

But for others, saying “no” to those big advance cheques is still tricky. So maybe a bit of government intervention is needed to push the Chinese market onto the next phase deals wise. Though an end to exclusivity arrangements could negatively impact the ambitious Tencent and its New York Stock Exchange listed music business, in the short term at least.