Tencent Music probe opens up whole new avenue for China antitrust enforcement in digital sector

Going after Tencent Music Entertainment is a bold step for China's competition regulator, not only because it is the country's first antitrust probe involving a domestic tech giant, but also because the case is constructed on novel legal grounds that would extend the agency's regulatory expertise.

MLex reported on Aug. 12 that the Chinese music-streaming service is the subject of an ongoing investigation by the State Administration for Market Regulation, or SAMR, into potentially anticompetitive exclusive-licensing deals with top music labels such as Universal Music Group, Sony Music Entertainment and Warner Music Group. More than 10 companies, including Apple, Alibaba, Baidu, NetEase and Huawei, have been summoned by SAMR to assist with the probe, which was officially launched in January.

The investigation, when news of it broke, took Chinese lawyers and businesses by surprise. Coupled with another newly launched investigation by SAMR against online e-commerce platforms for exclusionary behavior, the latest case sends a strong signal to companies and their legal advisers that the regulator is becoming more decisive when it comes to problematic behavior by Internet companies, however significant they are to the Chinese economy.

The change in SAMR's attitude didn't come without prior clues. In fact, recent remarks by a Chinese investigator already signaled tougher rhetoric, clarifying that the Chinese government's longstanding "inclusive and prudent approach" to the digital industry didn't mean that regulators were engaging in undue tolerance toward the sector.

"This prudent supervision is not laissez-faire, and the Internet is not beyond the reach of antimonopoly regulations," Wang Xuan, a principal staff member at SAMR's Antimonopoly Bureau, said in a keynote speech at a Hong Kong antitrust conference in June. "When it comes to illegal behavior that restricts or excludes competition, the regulator should continue to enforce the law in a strict and fair manner."

Wang is an investigator with the Antimonopoly Bureau's division in charge of enforcement over monopolistic agreements. MLex has learned that it is the same division that is handling the current investigation against Tencent Music, rather than the unit responsible for scrutinizing abusive behavior.

As MLex reported, 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 music resources. The company is also suspected of re-licensing the digital music at unreasonably high prices that stifle the survival of competing services.

Chinese regulators are known for their long view of tech giants such as Baidu, Alibaba and Tencent, an approach interpreted by observers as an attempt to nurture national champions capable of taking on foreign rivals. The latest probe, however, now puts these domestic players on the same page as global counterparts.

Amid a wave of EU regulatory efforts aimed at the tech sector, US antitrust agencies have announced fresh scrutiny of Google, Facebook, Amazon and others.

Novel legal grounds

SAMR has also opted to pursue the Tencent Music case based on novel legal grounds that don't play into its traditional areas of expertise, making the probe the first of its kind that involves non-price vertical agreements.

If it bears fruit, the decision will fill in some regulatory gaps by providing precedents to a part of the 11-year antitrust law that businesses and attorneys can take as useful references.

SAMR is assessing the foreclosure effects of the exclusive agreements between Tencent Music and the music labels, as well as their impact on raising the costs of rivals, instead of gauging whether the re-licensing behavior the service provides constitutes abuse of dominant position, as MLex reported.

Antitrust officials are convinced that breaking up the current licensing structure — where Tencent Music is given full discretion to decide on whether and how to distribute the music to competitors through its ties with multiple labels — is the right way forward to restore competition.

While the outcome of an abuse investigation targeting Tencent Music may only be one-off and company-specific, pointing out where the problem lies with such vertical agreements would deter other market players from adopting a similar network of arrangements to restrict competition. The Chinese choice of regulatory tools is therefore forward looking, given that any Internet company other than Tencent Music may quickly evolve to become the next dominant player in the fast-changing sector.

Supporters of Tencent Music have argued that exclusive licensing facilitates authorized distribution of copyrighted content in China, where piracy has tradtionally been rampant, before increased government crackdowns. Nonetheless, it is obvious that protecting copyright doesn't need to go in parallel with putting the bar too high for incumbent or potential rivals to bring about meaningful competition.

Chinese netizens have welcomed SAMR's probe, with many complaining about the absence of alternatives on the market. Some of them urged enforcers to act before it is too late to rein in the digital giants.

Tencent Music and its parent company, Tencent Holdings, didn’t respond to multiple requests from MLex for comment.