​Tencent Music under large-scale Chinese probe over anticompetitive copyright agreements with global music labels

Top music labels Universal Music Group, Sony Music Entertainment and Warner Music Group have been questioned by China's antitrust regulator over potentially anticompetitive exclusive-licensing agreements with Chinese music streaming service Tencent Music Entertainment, MLex has learned.

The unprecedented, sector-wide probe has seen more than 10 companies — including Apple, Alibaba, Baidu, NetEase and Huawei — summoned by the State Administration for Market Regulation, or SAMR, to assist with the investigation, which was officially launched in January, it is understood.

It marks a significant step by SAMR, because it is the first time that a Chinese Internet giant has been formally targeted, signifying the determination of antitrust officials to protect competition in a sector where the regulator has generally been tolerant in the past.

SAMR investigators have been actively pursuing the case, which is said to be the country's first-ever probe involving non-price vertical agreements since the country's Antimonopoly Law took effect in 2008. The National Development and Reform Commission, or NDRC, first looked at the issue in late 2017, but the work of its antitrust arm was folded into SAMR in early 2018.

It is understood that SAMR suspects that Tencent Music's long-term possession of exclusive copyrights of the Big Three labels and other music companies has harmed competition by limiting the ability of rivals such as NetEase's Cloud Music, Alibaba's Xiami Music and China Mobile’s Migu Music to access the world’s most popular and valued music resources.

According to the prospectus for Tencent Music's initial public offering, the company has China’s largest music-content library, boasting over 20 million tracks from more than 200 labels as of mid-2018. In addition to agreements with the Big Three, the company also has exclusive copyright agreements with companies such as South Korea's YG Entertainment and Hong Kong's Emperor Entertainment Group.

It is understood that representatives of Apple, Baidu, Huawei, Xiaomi and ByteDance were summoned by SAMR as part of its investigation, because their music platforms all rely on Tencent Music for the re-licensing of the music, which is argued is being distributed in China at unreasonably high prices.

MLex first reported in mid-March that the regulator summoned at least one industry player to discuss copyright distribution in the sector.

— Competitive harm —

In recent years, the popularity of streaming services has surged worldwide as consumers have switched from buying music in hardcopy or through downloads to using online music providers.

While China is no exception to the global trend, the country's model is unique in that a single music platform is fully authorized by the labels to use their music, as well as being given the right to decide on the distribution of the resources to its competing platforms.

Tencent is said to have only narrowly opened access to the music to incumbent and potential rivals in the market.

SAMR has decided to intervene at a time the situation is being perceived as adversely affecting the interests of consumers. Should the market remain insufficiently competitive, consumers may face reduced choices of music platforms. Subsequently, more of them may need to switch to paying services, because remaining providers are placing more music content behind a paywall.

According to statistics compiled by Chinese consulting firm iiMedia Research, Tencent's three music apps — QQ Music, Kugou and Kuwo — accounted for more than 65 percent of the total number of music downloads by Chinese smartphone users in 2017. NetEase followed with 9.1 percent and Baidu with 4.3 percent.

— Probing agreements —

Although Tencent Music arguably has a market share that exceeds the statutory 50 percent threshold for SAMR to determine that it has a dominant position, the regulator has decided not to construct its case based on possible abuses of dominance, but rather potentially anticompetitive vertical agreements, MLex was told.

This contrasts with earlier reports by some media saying that the company was under a Chinese probe for alleged abuse of dominance.

Industry observers said the regulator may be seeking a wholesale overhaul of the industry's business model by pointing out the illegality of such arrangements, instead of merely correcting a dominant player's behavior and allowing the current market structure to continue.

Given that enforcement over vertical agreements requires a rule of reason, SAMR is understood to have made references to economic analysis. Possible theories of harm that could be applied to the case include cumulative foreclosure effects and raising rivals' costs.

Copyright costs of the surviving music platforms have surged by more than 50-fold since 2013, according to industry statistics.

— Vertical agreements —

Article 14 of the Antimonopoly Law bars businesses from concluding anticompetitive agreements with their trading counterparts. While price-related vertical agreements such as resale price maintenance, or RPM, are explicitly prohibited, the law doesn't clearly specify the situations where non-price restraints could be a problem.

The latest investigation is expected to offer both the business and legal communities an insight into SAMR's thoughts about problematic vertical agreements.

According to SAMR's interim regulations released in June, the regulator has to consider a range of factors — such as an entity's market share, its control over a market, the impact on market entry and the impact on other businesses and consumers — when assessing non-horizontal agreements. Although the regulations aren't retroactive, SAMR officials may nonetheless take those as useful references.

In the proposed amendment of the Antimonopoly Law, the regulator is looking to provide more clarify for vertical agreements that it deems are harmful to competition.

Tencent Music, Universal Music, Sony Music and Warner Music didn't respond to a request for comment as of publication time.

In the latest tie-up in the industry, Paris-based Vivendi said on Aug. 6 that it is in talks with Tencent Holdings for the Chinese company to buy 10 percent of its subsidiary Universal Music, in a deal that would value the music label at 30 billion euros ($34 billion).