FAIR PLAY

A month later, Tencent notified upstream copyright owners that most of their exclusive contracts were already voided, and that it would voluntarily relinquish exclusivity in all other agreements. 　

The case is a milestone for China’s 13-year-old Anti-monopoly Law, the first time market regulators had intervened after a merger. In 2016, Tencent acquired China Music Corporation (CMC), its main competitor. Together the two held over 80 percent of the market’s exclusive streaming rights. The large market share Tencent acquired might “have an effect of precluding and limiting competition in relevant markets,” according to the regulator. 　

Since the end of 2020, regulators have penalized 44 similar concentrations among internet companies, including Tencent. Most used VIEs (variable interest entities) to go public overseas, which involves registering shell companies to get around foreign investment restrictions. It was common practice for companies like Tencent and CMC not to make disclosures until the deal was done. 　

“Some VIE-structured companies declared mergers in advance, but authorities did not approve them. It was not until last year after long negotiations that these [VIE-structured] companies’ disclosures were accepted,” a lawyer who helps companies declare mergers and acquisitions said on condition of anonymity. Anticipating rejection, many VIE-structured companies simply wait to declare. “They think it’s better to save themselves the trouble,” he said. 　

Liu Xu, a research fellow at the National Strategy Institute, Tsinghua University, told NewsChina that in 2012, regulators pre-approved Walmart’s acquisition of VIE-structured shopping platform YHD. com, a precedent that Tencent could have cited. “But since undergoing an anti-monopoly investigation might delay M&As and arouse scrutiny from the public and competitors, Tencent skipped declaring because the cost of violating the law was so low,” said Liu, adding that investigations can take from two to five months. 　

What makes Tencent’s case unique is that regulators believed its CMC merger to “have, or probably have, the effect of precluding and limiting competition.” State regulators argued that after the merger, the new business entity Tencent Music Entertainment had an over 83 percent market share in terms of active users. Also, the merging of the market’s two biggest players further dilutes competition while raising the threshold for new entrants. 　

“After the merger, [Tencent] secured a large amount of copyrighted music, forcing later entrants to get authorization from it, which makes it more difficult for them to enter the market,” wrote the State regulator’s ruling, adding that new entries to the market dropped significantly following Tencent’s merger. 　

Liu said that regulators should have required Tencent to split Kugou and Kuwo and restore their competition with QQ Music. But as the merger happened five years ago, regulators forced Tencent Music Entertainment to end its exclusive copyright agreements and prohibited it from signing more exclusive contracts with copyright owners. Regulators gave Tencent Music Entertainment 30 days to end existing exclusive agreements and put a three-year limit on exclusive signing deals with independent musicians. 　

Liu Xiaochun, deputy director of the internet law research center at the University of Chinese Academy of Social Sciences, explained that the greatest competitive edge for digital music is copyright. Other factors, such as business and profit models, are not as exclusive. 　

The ruling reinforces the idea that exclusive copyright agreements, instead of the market share after mergers, plays a bigger role in determining competition in the music streaming market, interviewed experts said. 　

“The consequent large market share might enable a platform to push upstream copyright owners to grant it exclusive copyrights or provide better terms than other competitors. It might also enable 　

Tencent to raise market barriers by paying high deposits [for copyrights],” the regulators said. 

Exclusive copyright first attracted attention in 2015 after the National Copyright Administration prohibited online music providers from hosting unauthorized music. The consequent enforcement curbed the rampant piracy and copyright infringement in the industry. But as competition grew fiercer, exclusive and high-priced copyright agreements with record companies were the go-to strategy. 　

This means other music platforms needed to pay the copyright holder for use, explained an industry insider who spoke on condition of anonymity. 　

Several years ago, QQ Music signed exclusive deals with copyright owners and established a copyright alliance with major record companies. Alibaba Music (established in 2015) and Netease Music soon followed. But after years of competition and M&As, QQ Music came out on top. Alibaba’s streaming service Xiami Music folded in January, ending the platform’s 12-year run. 　

Exclusive copyright protects intellectual property and motivates music platforms to fight piracy, which has helped improve the industry’s overall environment, the industry insider said. 　

But Liu Xu said that such exclusive deals resemble the notorious “choose one from two” tactic used by some e-commerce platforms, which force vendors to sign exclusivity deals. “These are exclusive agreements signed between platforms and online operators,” Liu said. Such agreements are common and do not necessarily hinder market competition, but their effect depends on the scale of the companies involved and the nature of the contracts. “This explains why when VIP.com, an online discount retailer, and Alibaba violated rules by using the ‘choose one from two’ tactic, the former was fined 3 million yuan (US$464,000) while the latter was fined 18.23 billion yuan (US$2.8b),” Liu said. 　

Liu said that Tencent Music Entertainment monopolized catalogue copyrights for many top musicians to squeeze out competitors, making it hard for them to accumulate paid users and profit in the short term, thus losing appeal in the capital market. 　

Established music platforms only become stronger, Liu said. In 2018, Tencent Music Entertainment boasted an over 20 million-track catalogue, twice that of its biggest competitor Netease Music, and had more than 200 million more users than Netease. “The more active users a platform has, the quicker its paid user base grows, making it more attractive to musicians,” Liu said. 　

What’s more, exclusive copyright agreements and the fights surrounding them are blamed for raising copyright costs. In a 2018 lawsuit, Tencent, who bought the exclusive copyrights to Taiwanese musician Jay Chou’s catalogue, sued Netease for streaming Chou’s songs after the platform’s authorization contract with Tencent expired. Netease told media that Tencent’s fee rose from 8.7 million yuan (US$1.3m) to 18.18 million yuan (US$2.8m) between 2015 and 2018. 

In 2020, Netease saw 1.6 billion yuan (US$247.5m) in net losses while Tencent earned 4.16 billion yuan (US$643.6m) in profits over the same period, accounting for 72.8 percent of market share revenue. In its 2020 prospectus, Netease listed copyright as a risk factor to its income, saying it could not guarantee its existing copyrights on reasonable terms in the future and anticipated rising copyright costs. 　

Authorities first turned their attention to exclusive copyright four years ago. In September 2017, the State Administration of Press, Publication, Radio, Film and Television held talks with platforms including Tencent, Alibaba and Netease and domestic and international record companies concerning exclusive authorization of music copyright. It occurred a year after Tencent’s merger with CMC and four months after Tencent acquired exclusive copyrights from the three biggest music publishing companies in the Chinese mainland – Global Music Group, Sony Music Entertainment and Warner Music Group. After the talks, Alibaba and Tencent shared some of their copyrights with each other. In February, Netease and Tencent, pushed by regulators, authorized 99 percent of their exclusive catalogues to each other. 　

But this may have failed to achieve the desired effect. The industry insider revealed to NewsChina that despite the sharing, all parties have retained exclusive copyrights to many catalogues of the most popular musicians. “Granting authorization of other music works did little to shake Tencent’s advantage,” he said. 　

After Tencent said it would give up its exclusive copyrights, Ding Lei, CEO of Netease, responded that they “hope it is a wholehearted decision and will be executed honestly.”